STEP Caribbean Conference
- May 9, 2005 -
Development of Trust Law by the Offshore Sector
At first blush, the title
of this topic might seem to be ambitious, or even radical.
But, in truth, the offshore sector has been responsible for
significant developments in trust law. Some of these innovations
remain insular, peculiar to offshore business, but many others
have filtered through to the onshore sector, or, at least,
acted as catalysts for trust law reform. Indeed, in
general, the offshore sector makes a significant contribution
to our legal system, introducing many important new legal
concepts and clarifying and correcting several gaps in our
However, of the many creative jurisprudential changes brought
about by the offshore sector, none are more dynamic than those
of trust law. The simple reason is the attractiveness of the
trust as a tool for offshore investment, and the relative flexibility
of the trust concept itself, the trust being an ingenious tool
of equity created for just such rationales, to introduce flexibility
into rigid legal systems and to enable accommodation of important
business and societal goals.
The offshore trust is
a fascinating creation of statute, a fact which, in of itself,
challenges the notion of the trust as a characteristic creature
of equity. Although grounded in statute, the offshore trust
borrows heavily from the familiar principles of equity. Notwithstanding,
it embodies unique concepts radical to the traditional trust.
I have coined the term >hybrid
describe this new entity. This paper examines some of these
and attempts to locate the place of these new� precepts
in trust jurisprudence, now and in the future. In sum, the
offshore sector can be applauded for creating the first indigenous
and well regulated trust creation of modern times. In so
doing, it has compelled jurisprudential re-thinking about
the nature and functions of the traditional trust.
What is offshore Law?
First, let us be clear about what we mean by offshore law.
My own definition is this: a body of law Aconcerned with investment,
financial arrangements and entities, created by non-residents
of a particular jurisdiction� but structured within
that jurisdiction. Such investments or arrangements are typically
focussed on some business advantage, tax avoidance, protection
from creditors and judgment debtors or privacy.@
Consequently, offshore trust law, that law which defines and
creates particular forms of the traditional trust, operates
within a special legal framework designed for the peculiar
needs of offshore investment.
You will notice that offshore law is what may be seen as a
subset of the entire legal system, or, put another way, an
alternative legal system and one that has been created primarily,
or even exclusively, for foreign investors.
Context of Offshore Legal Infrastructure
The offshore legal infrastructure is one created purely for
commercial reasons. And herein lies the dilemma: It is the
very� success of the offshore sector in attracting business
and income from foreign, more wealthy shores that has been
its magnet for confrontation.
I have consistently argued that much of the challenges and
attacks made by some more developed countries and international
organizations, the OECD, the US� etc. with respect to
the offshore sector, about alleged money laundering, secrecy,
unfair tax competition etc. has less to do with legal principle
and more to do with dollars and cents. It is clear that offshore
investment has resulted in developed onshore countries losing
much revenue, much of it what is perceived as potential tax
revenue. Indeed, in this endeavour
, the offshore trust has been an effective vehicle.
No doubt, some financial impropriety exists within the offshore
sector.� But financial impropriety exists everywhere
. There is sufficient proof that most of it, money laundering,
financial transactions that benefit terrorism etc.� occurs
most frequently in the large, metropolitan financial centres
of the world - such as NY, London, Russia. We need not mention
Enron etc. Yet, we have seen a barrage of financial regulations
and attacks requiring offshore financial centres=s to do much
more in the way of self-regulation than these large centres
Commercial Rationales No Indictment
It is clear that the evolution of current legal entities and
principles, or the creation of� radically new ones by
the offshore sector speak to real, commercial needs. However,
the fact that their raison d=etre
is business and commercial enterprise is no indictment.� The
rationales of many laws are the same, so offshore laws are
no less worthy in this regard. In fact, trust law was created
to assist wealthy persons from saving their property during
war and later, tax revenues owed to a greedy state B this was
the UK experience of the landed poor.
Similarly, the creation of the limited liability company in
company law was first thought to be unethical and unconscionable
(once described as company law=s >race to the bottom=),
but has become a staple and indeed, has been credited as advancing
company law. Indeed, the limited liability can now be viewed
as a bastion of capitalism and free enterprise and company
law has been made more viable and more relevant to today=
s commercial environment.
In similar vein, offshore laws, including offshore trust law,
in seeking to uphold the� principles and needs of commerce� and
international business are not out of sync with other areas
of commercial law and should be judged in the same way.
Traditional Trust Law
Not surprisingly, offshore modifications of traditional onshore
law are entering the mainstream of trust jurisprudence. Slowly,
for example, there is a recognition that offshore trust law
and its accompanying grund norms, such as confidentiality etc.
can elevate more traditional areas of law found onshore.
Indeed, the attractiveness of the offshore legal solution
and its developmental approach has proven so effective, that
today, even states in the US (once a staunch enemy of offshore
, have sought to emulate offshore jurisdictions. Alabama, Delaware
etc. have� introduced trust, banking and tax laws which
borrow heavily from offshore legal paradigms. They offer similar
products to those that offshore jurisdictions have created
to persons and companies not resident in their state.
The rationale of what I have termed >offshore-onshore regimes=
is competition B if we can=t beat them B then we will join
them. As indicated earlier, we are really speaking about dollars
and cents However, this copy-cat approach should be welcomed,
as it proves the credibility, legitimacy, viability and intelligence
of the offshore law approach. Surely, offshore law cannot be
effectively challenged if onshore states are now redefining
their own legal systems so as to incorporate so called
>offshore= type laws, previously frowned upon.
For example, self-settled, protective trusts are now allowed
in such states for� non-resident trusts, despite long
standing rules in US courts that such trusts are against US
There is, of course, a dichotomy here: the rest of the US
adheres to the rule that it is against US policy, but in US
offshore trust states, it is allowed for non-residents. This,
to my mind, raises the question whether it can still remain
a rule of US public policy, but that subject is beyond the
scope of this paper.
New Types of Trusts and Trust Functions
The evolutionary and adventurous nature of offshore trusts
law is manifested both in the type of trusts offered and in
the functions permitted under offshore law. Even new officers
have been created, such as the protector and the enforcer, which
in turn, conjures up new jurisprudential questions to resolve.
Offshore law allows a host of things that a traditional trust
cannot do, or do effectively. Most importantly, given the commercial
objectives of offshore law, offshore trusts are more closely
aligned to business and companies than their onshore counterparts.
The newest form of offshore trust, the VISTA trust, ably
demonstrates the symbiotic relationship of the offshore trust
and the company in offshore financial centres within the broader
backdrop of commercial efficiency. The VISTA trust allows traditional
obligations of trustees with respect to the use of shares in
investment, to be exercised by directors of underlying companies.
In so doing, it recognises the limitations of professional
trustees and insulates such trustees from liabilities that
may accrue from risky commercial ventures.
Just as company law was liberated by limited liability, so
too the objective in offshore trust law. The trust is now a
more viable commercial entity, granting wider control to settlors
and business interests associated with the trust, and attempting
to insulate investment from restrictive principles . In doing
this, it has championed the cause of the freedom of disposition
of property, including the prioritization of the interests
of named beneficiaries over future, unidentifiable creditors.
The offshore trust has even attempted to overcome difficulties
associated with international investment by persons in civil
law regimes. One route is that is allows persons from civil
law jurisdictions to take advantage of the trust=s unique three
tiered structure which embodies the concept of dual ownership,
something that we in common law jurisdictions have done for
This duality is crucial for the success of the trust in investment
as it allows the manipulation of the elements of ownership
and control. With the establishment of a trust, an offshore
settlor, the original owner of the assets, although initially
determining the pattern of investment for the trust, is no
longer considered the owner of the assets under trusts law.
The potential escape route with respect to tax and other liabilities
is significant although, as we will see later, onshore jurisdictions
have countered with legislative changes of their own to prevent
the logical applications of trust law.
Apart from simply benefitting from the trust=s multiple structure,
the offshore trust allows civil law settlors to do specific
things, impossible or difficult to achieve under their own
law and legal vehicles, such as avoiding forced heirship or
mandatory succession regimes.
Other examples of changes wrought for direct commercial advantage
(a) abolishing perpetuity and accumulation rules or extending
them; thereby allowing the creation of dynasty trusts, trusts
which can continue for longer or even indefinite periods, and
in so doing, fulfilling longer-term investment objectives;
(b) creating purpose trusts; and
(c) defeating the well-established Saunders v Vautiers rule.
Settlor Influence and
Identity and the Use of the Protector
Characteristically, the offshore trust is distinguished by
the identity of the settlor and the nature of his or her interest.
Importantly,� offshore law and practice gives to settlors
more leeway than settlors under� traditional trusts.
Offshore settlors are typically allowed a greater degree of
self-settling than under onshore trusts. Commonly, such a settler
will be one of the discretionary beneficiaries, have a life
interest, other limited interest or reserved interest. Under
more aggressive legislation, the settlor may also be a trustee,
a beneficiary or a protector.
In addition to the more generous interests which may be reserved
to the offshore settlor, there are more channels of potential
influence open to him or her. For example, the settlor
=s wishes may be heeded through a memorandum of agreement to
the trustee� or the settlor may retain powers of appointment
Further, the existence of a special trust officer, the protector,
to liaise between the beneficiaries and trustees, also creates
an additional route to settlor influence, albeit, in many cases,
indirectly. The perhaps surprising legislative manoeuvre does
nothing to allay fears of excessive settlor influence, a significant
factor in US cases which questioned the integrity of the trust.
In fact, the precise nature and role of the protector and
the duties and liabilities which attach to that office is still
being ironed out in offshore trust law. The protector=s functions
may be either dispositive or administrative and may even encroach
on powers normally left to the trustees. Such functions range
from making important investment decisions upon which the trustee
is directed to changing the proper law of the trust, revoking
powers of appointment, to merely engaging in consultation with
A key question is whether the protector is a fiduciary or
significance of this question lies in the degree of supervision
by a court, with a fiduciary protector being� subject
to the full inherent supervisory jurisdiction of the courts,
and the attendant rules such as duties to act in good faith,
with reasonableness, etc.
A few legislatures have labelled the protector, some as fiduciary,
others as non-fiduciary. Yet,
even this legislative designation (albeit desirable) of the
nature of the protector, may not determine the issue, as a
court, whatever the label, may still proceed to examine carefully
the actual powers granted to the protector before coming to
The cases have not been consistent thus far but may be seen
to be determined by the kind of power granted to a particular
protector under the trust instrument. The uncertainties surrounding
this issue also points to the need, not only for legislative
and judicial clarification, but also for precision and specificity
in drawing up the trust instrument.
Spendthrift or protective trusts, which are designed to insulate
trusts from the reach of creditors, are not unique to offshore
trust law. However, they are specifically promoted and often
given special insulation, even to the extent of seeking to
void rules of public policy which prohibit such trusts when
they are combined with self-settling. Indeed,
the phenomenon of self-settled, spendthrift� trusts,
common in offshore trust regimes, indicates a radical direction
in trust law. It has initiated several legal challenges to
offshore trusts, often leading to inferences that such trusts
are shams, or in the US, against public policy.
The Purpose Trust
The purpose trust is worthy of special mention. Such a trust
seeks to abolish the rule under orthodox trusts law that a
trust must have an identifiable beneficiary. The revolutionary
purpose� trust holds the trust assets only for a specific
purpose, such as to hold shares in X company. In fulfilling
its commercial objectives, the purpose trust also clarifies
problematic issues of equity relating to who are legitimate
identifiable beneficiaries and the nature of the >beneficial
purpose= exception.� This rule against the absence of
identifiable beneficiaries is without real justification in
a modern commercial environment.
Purpose trusts are established under special legislation which
along with permitting trusts without identifiable beneficiaries
as valid trusts, endeavour to solve the accompanying problem
of regulating the trust. In an orthodox trust created by equity,
it is to the beneficiaries that the trustees must account.
Clearly, without identifiable beneficiaries, a mechanism must
be found to ensure accountability. Purpose trust legislation
overcomes this obstacle by creating a special officer to regulate
the trust. In many countries this officer is known as the enforcer.
The elevation of the trust to permit purpose trusts has had
wide impact internationally. For example, Hayton has recommended
such a change for the UK and
in Canada, law committees are now considering appropriate law
is but one example of the new legal ideas emanating from offshore
jurisdictions and being transplanted from offshore to onshore.
Asset protection trusts
Offshore trusts law� has coined the term >asset
protection trust= or
>creditor protection trust= for trusts which seek to offer
more comprehensive protection against potential creditors reaching
assets which have been placed into trust. While all trusts� are
set up to preserve assets on some level, it is the degree of
preservation that is important here. Such a trust may be viewed
as a type of insurance. It seeks to relax or clarify areas
of trust law concerning creditors who are not already in existence.
However, such new legislative norms, combined with the greater
levels of control typically afforded offshore settlors and
the existence of flight and duress clauses, have
brought some offshore trusts into contention, particularly
with respect to the laws on shams and fraudulent conveyances,
discussed below. Such trusts are approached with caution by
many practitioners and some offshore jurisdictions.
Duties and Liabilities of Trustees
The redefinition of the
trust� to suit business needs even extends to the duties
and liabilities of trustees and beneficiaries. These have become
controversial questions which have forced reevaluations of
traditional trust law.
The Question of Trust Information
One important question is how much information should beneficiaries
have where a trust is essentially a commercial enterprise and
the beneficiary is unschooled in business or where the trust
is set up to prevent a spendthrift heir wasting away the assets? In
addition, beneficiaries often do not even know of the existence
of the trust, given offshore confidentiality laws and the settlor=s
Previously, it appeared to be sufficient that the law simply
required beneficiaries to have information about accounts or
to be informed of the trust by the trustee since trustees are
ultimately� accountable to beneficiaries.
inherent in offshore law, militates against the thrust toward
a generous attitude to information. Offshore� legislation
attempts to balance these competing needs of accountability
and confidentiality / business efficacy.
In the authoritative,
but surprising Rosewood decision
emanating from the Privy Council, that court dispelled the
long, entrenched notion that beneficiaries, even those with
vested interests, are entitled, or have an inherent
right to information on the trust.� The
court reserved the decision about information to the discretion
of a court. Beneficiaries who are mere objects of a discretionary
trust cannot be automatically excluded from such rights to
information but neither are any beneficiaries entitled.
The matter now falls under the inherent supervisory jurisdiction
of the court over trusts.� In some cases, beneficiaries
are not entitled at all. However, the parameters of this discretion
are yet to be determined and is an area ripe for juristic clarification.
On the other hand, the
preponderance of offshore trusts with underlying companies,
where often the trustee owns a large percentage of the company=s
shares, has led to a rule that beneficiaries� who
are entitled to information about the trust are also entitled
to information about the underlying companies. This is an
important new departure. �
Liabilities of Trustees
With regard to the liabilities
of trustees, new horizons are emerging. New directions
in traditional trust law, such as the appropriate tests for
knowing receipt and dishonest assistance cases, also
have great significance for offshore trusts.
One area of trust jurisprudence with special import to offshore
trusts concerns the labiality of professionals who either establish
or deal with offshore trusts which become entangled in suits
for negligence, breach of trust or even criminal liability
as is the case for fraud (including fraudulent conveyances)
or money laundering. Such professionals are being held to ever-increasing
high standards. In cases of negligence, key concepts are reasonableness
and forseeability, including imputed knowledge.
 Such duties and liabilities also extend to underlying
bringing into train legislation to challenge such jurisprudence
in the form of VISTA trust legislation in the British Virgin
Islands, discussed earlier. These new trusts excuse trustees
from such managerial duties and liabilities, investing them
solely in the directors of the company.
These increasing liabilities lead to yet another grey area
for trusts, that is, the extent to which the trustee can be
legitimately exempted from such liabilities in the interest
of commercial expediency. Perhaps
the most important question is how much liability should professional
trustees (like yourselves) with advertised business expertise
Exculpatory clauses are becoming increasingly common and debate
is ensuing as to how wide such clauses should be. The typical
offshore trust structure, with a professional trustee, often
supported by a specialist investment professional, does not
necessarily square with the traditional trust jurisprudence
which tends to expand the duties and liabilities of trustees.
For example, professional trustees may not actually be valued
for their business acumen in terms of investment, and broad
liability for negligence in this area may actually scare away
some professional trustees.
� The key question is whether the tendency toward wide
exculpatory clauses is repugnant to the fundamental principles
of a trust.
In addition, the offshore trustee often has to keep abreast
with highly sophisticated and fast changing tax rules, discussed
below, relevant to the trust and emanating from onshore jurisdictions.
This is perhaps the reason for the lenient approach taken by
the courts to the Hastings Bass principle where
such tax questions are involved. This is yet another area which
has to be developed, particularly given juristic reservations
about the expansive use of the rule.
Conflict of Laws
The offshore sector has sought to clarify and even create
conflict of laws rules. This is especially important in relation
to trusts, where, traditionally, few such rules existed. This
initiative has a dual purpose, as in order for innovative trust
law principles to survive, it is imperative that the offshore
trust falls under the jurisdiction of the offshore law regime
and not that of the onshore law. Hence, the law needs to be
configured so that in a potential conflict, it is the
favourable offshore law that will govern and determine the
This, in turn, means that other jurisdictions are able to
consider these legislative solutions to what are gaps in the
law, as credible legal solutions for onshore trusts also. This
is particularly� the case as the offshore sector has
sought to be in line with the Hague Convention on Trusts as
far as possible. Indeed, I would argue that the offshore trust
sector has considerably advanced the existing meagre jurisprudence,
particularly with regard to the recognition of the trust, capacity
and the proper law.
For example, offshore jurisdictions promote the settlor=s
choice of law as the proper law of the trust. This is in keeping
with the modern position as gleaned from the Hague Convention
on Trusts� It thus gives priority to the autonomy of
the settlor and the owner of property. More conveniently, it
allows the settlor to choose the more user-friendly offshore
trust law as the proper law. As this is an emerging issue,
few courts have pronounced on this but the evidence suggests
that this is an appropriate approach.
Similarly, courts, even courts outside of the region, are
beginning to pay respect to offshore law practice to point
to the offshore jurisdiction as the one with exclusive jurisdiction
over the trust. In Green v Jernigan, for
example, a Canadian company did so with respect to an offshore
trust set up in Nevis where Nevis was chosen as the exclusive
forum for jurisdiction. The court found that there must be
a >strong cause= to displace such exclusive jurisdiction
clauses.=� Such judgments are certainly helpful for
the viability of offshore law which depends on jurisdiction
and proper law issues as initial questions before substantive
questions such as the recognition of the trust, capacity and
trust law content can be addressed.
In the area of the recognition of trusts, offshore trusts
have made significant impact. The offshore legislative approach
of stating clearly that the offshore trust is to be recognized,
and to be governed by offshore law, is now an accepted one.
Offshore trusts are to be recognized under offshore law, whether
or not the settlor originates from a civil law jurisdiction.
Again, this is a difficult issue under onshore law. Often,
trusts were not recognized or were transformed into some other
similar entity, such as the foundation or a type of contract,
to enable dealings with civil law settlors. This was the defect
that the Hague Convention on the recognition of trusts sought
to cure. Thus, the offshore approach facilitates the goals
of the Hague Convention on Trusts.These positive outcomes have
come despite the absence of ratification of the Hague Convention
on Trusts in some cases. Important cases to be noted on the
recognition issue include Casani v Mattei and Re
an Isle of Man Trust.
In Casani, the trust was recognized although it sought
to defeat forced heirship rights in Italy, thereby answering
a question which had long been asked in relation to the survivability
of anti-forced heirship provisions, such as are found in offshore
trusts, when addressed by civil law courts.
The Italian court found that such a trust did not violate
public policy, and was not, and could not be invalid on that
ground, as the trust was essentially, a recognizable entity.
Further, other means could be found to satisfy disappointed
These are significant contributions to trust jurisprudence
and to our legal infrastructure.
Another fascinating area of offshore trust law concerns civil
law settlors, and whether they have the capacity to create
common law trusts. For my part, I am not convinced that such >would
be= settlors inherently lack the capacity to create a trust,
despite originating from a jurisdiction that does not have
trust law. The difficulty arises because under traditional
trust law, the question of capacity is determined by personal
characteristics such as insanity or residence etc.
Happily, however, offshore legislation clarifies the position
and grants or deems capacity to such persons, then declaring
that the question of capacity is to determined by the offshore
is buffered by provisions which facilitate the choice of offshore
law as the governing law, which law is self-serving to the
issue of capacity. Such provisions are further insulated by
a holistic legislative regime which dictates that the capacity
question is also to be read in conjunction with provisions
on the non-enforcement of judgments that may challenge offshore
is, once again, an advancement in traditional trust law, and
one which has been tacitly been approved in recent cases where
civil law settlors created trusts which were recognized.