What Is A Trust?

In discussing offshore tax havens, a term that frequently arises is trust.  In a legal context, a trust is a relationship where one party holds another party’s property.  The settlor turns over control of assets to a trustee, the individual(s) in charge of holding the assets.  The trustee is in charge of disbursing the property to the beneficiaries named by the settlor.  The trustee will usually have instructions given to him by the settlor as to how the assets should be disbursed: to what party or parties, how much, when, should the assets be used or invested in the meantime.

Why would someone ever want to turn over their property to another person?  There are various reasons, both for licit and illicit purposes.  The most common use of a trust in the popular imagination is the image of the “trust fund child”- essentially this child is the beneficiary of a trust, perhaps created by a wealthy relative, and administered by a third party (a banker, lawyer, accountant, or trusted relative.)  The benefactor might not be confident that an immature young person is capable of managing significant assets, so rather than simply handing them a check, the benefactor sets up a trust.  The instructions might be “my niece is to receive X dollars each year, and use of the summer home in Cape Cod, until her 18th birthday, when she will receive the remainder of the money as a lump sum and the deed of the summer home.”

In a trust arrangement, the beneficiary gets to enjoy some of the assets but does not have control over them until a certain time.  Such a trust can also be used to avoid inheritance taxes and keep the assets from having to go through probate court, by creating and transferring the assets prior to the settlor’s death.  This arrangement also makes it much more difficult for someone who objects to the will to stop the deceased’s wishes from being carried out.

There are plenty of other uses for trusts, especially for purposes of protecting assets.  “Possession is 9/10ths of the law” is certainly apropos with regard to trusts.  By transferring assets to a trust, it is simply more difficult to take them away.  If the trust is offshore in a tax haven, it can take extraordinary effort to recover- usually a court compelling the settlor to direct the trust to hand over the money, under pain of being held in contempt by a judge.  If I owe you $100, you can come to my house and take it by force.  But if I’ve handed over all my assets to a trusted friend to keep safe, you’ll have to first coerce his name out of me, and then convince or compel him to hand over my money.

Off-shore trusts provide an additional layer of secrecy as well as plausible deniability.  If assets have been legally handed over to the trust, you are typically no longer considered the owner- though the law may look differently if you clearly are utilizing the assets.  For example, if you turn over assets to an offshore trust to avoid paying taxes on them, but continue to use the accounts as your personal petty cash fund, the law would clearly frown on this.  (Though the secrecy provided by the tax haven makes it difficult to catch and prove.)  Settlors often tread this line by (1) continuing to exert control over the decision making of the trust, directing the trustees to make transactions on the settlors behalf, and (2) by trying to enjoy the assets but not paying appropriate taxes because they are not the actual owner.  An example of the latter would be having your trust pay for and maintain a property in its name, but you use the property without paying taxes on it.  Are you actually a guest of the trust, or are you merely using it as a sock puppet?  As with many tax haven arrangements, the veil of secrecy allows unscrupulous individuals to abuse grey areas of tax law, confident that it will go unnoticed by the IRS- but even if it does, a trust can give them an extra layer of deniability.

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