History of Trusts
Common Law: An Overview
The two fundamental common laws
Trusts
What do Trusts have to do with taxes?
Cayman Island History creates tax freedom today?
HISTORY OF TRUSTS
Trusts are rooted in antiquity.
Evidence of the earliest known trust was discovered in an Egyptian tomb, part of a document containing a personal last will and testament written in 1805 BC.
Trusts existed in both Roman and Greek law as well.
Roman law officially recognized the trust concept, or fiducia (giving us fiduciary in English), during the reign of Emperor Augustus Caesar nearly 2,000 years ago.
Imperial acceptance of the trust resulted from the actions of a deceitful friend whom a wealthy Roman asked to act as the trustee of his property after his death.
Since his wife was not a Roman citizen neither she nor their children could inherit.
So the Roman devised a plan in which he willed his property to the friend, in exchange for the friend's promise to use it only for the benefit of the children.
After the man's death, though, his friend betrayed the trust by using the property for himself.
When news of this wrong came to the Emperor's attention, the "trustee" was brought before the Roman courts, found guilty of breach of trust, and punished.
This ruling was the first recorded judicial approval of trusts in Roman law.
Thereafter, the device became so popular among Romans that a special court was created to deal exclusively with trust matters.
In the Middle Ages trusts afforded the benefit of privacy. When the quasi-religious Order of Knights Templar acted as international financiers in Paris, the trust was a common device for royal and ecclesiastical investors to shield their financial activity from the public and each other.
The trust may also have been the western world's first tax shelter.
In 16th-century England, trusts took on tax-shelter aspects that allowed citizens to avoid feudal taxes on property inheritances and transfers.
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COMMON LAW: AN OVERVIEW
Because pure trusts are rooted in common law, it's important to know something about that legal tradition and how it differs from statutory (i.e., legislated) law.
Until the 12th century, law in the western world consisted of written civil laws all traceable to Roman law.
The basic legal system still prevails in many countries as well as in the state of Louisiana.
However, after the Norman Conquest of Britain in 1066, a legal tradition called the "common law," quite different from the civil law code, began to develop in England.
In the 1100s during the reign of the legal reformer, King Henry II, court decisions were written down and catalogued according to the type of case.
Then when the courts were called on to decide similar issues later, they reviewed the earlier decisions.
If they found a similar case, they applied the principle of the earlier decision.
They called this doctrine stare decisis, a Latin term meaning "to stand by the decision."
Under the rule of stare decisis, once a legal issue has been resolved as it applied to a particular set of facts, a court did not reconsider that legal issue in a later case where the factual circumstances were substantially similar.
While this did not mean that every decision stood forever, the principle of stare decisis was a strong one.
Judges were reluctant to discard well-established rules and took great pains to explain a significant departure from a precedent.
During America's colonial period, English common-law tradition did not change much.
The U.S. Constitution, ratified in 1789 and based on common law inherited from England, became the foundation on which the American legal system was built.
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THE TWO FUNDAMENTAL COMMON LAWS
1. Do all you have agreed to do.
(This is the basis for contract law).
2. Do not encroach on other persons or their property.
This is the basis for both criminal and tort law. (A "tort," from the French meaning a wrong, is harm done to someone).
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TRUSTS
Like corporations, trusts were originally spawned by non-tax considerations.
A careful parent concerned about a frivolous child would transfer some of his wealth in trust using a contract (the trust deed or instrument) between himself (the settlor) and a trustee. The trustee could be counted on to manage and disburse the trust assets for the benefit of the child.
The trust operates as a legally distinct entity, like a corporation, with its own assets and liabilities.
A trustee would invest the assets within limits expressed in the trust deed.
He would pay the child, as trust beneficiary, a regular sum.
The money distributed would include both the return on the investment of the trust principal, the original sum constituting the assets of the trust, as well as portions of the principal itself.
The trust would be legally required to terminate at some point when all funds, principal, and return on principal, have been distributed to the beneficiary, less management expenses incurred by the trustee.
As you can see, a trust serves a role similar to that of a will with additional advantages because it allows:
1) private disposal of assets separate from one's will which must be made public;
2) separation of designated assets from property for inheritance purposes before death, making these assets immune to further liabilities incurred by the trust creator. This is especially so if the trust is irrevocable, meaning the trust cannot be revoked and assets returned to the creator.
3) Competent professional management of trust assets.
4) The settlor to encourage aspects of a beneficiary's life by allocating benefits for certain specified purposes. This contrasts with a will which transfers ownership but usually cannot establish total control over how transferred assets are used.
5) Avoidance of laws that direct how property must be divided. The major disadvantages of a trust are irrevocability and the chance of trustee abuse. The latter can be avoided by careful trust deed and trustee selection.
In the case of professional trust companies, any temptation to abuse trustee powers is strongly moderated by the need to maintain a good professional reputation.
In many ways trusts are quite different from corporations.
Usually, they need not be publicly recorded.
A legal contract or trust instrument accompanied by transfer of the creator's assets to the trust fund establishes the trust.
Under a trust; the beneficiaries are "third parties" entitled to sue the trustee for violations of trust deed provisions but they are not parties to the original contract one party to the contract, the trust creator, usually has no official right to intervene in the management of the trust.
The trustee has full power to manage and distribute trust assets but may not have any personal interest in the trust.
The trust is an historical development of the "common law" arising from cases decided in the English courts rather than from statutes. It is recognized in the UK and all Commonwealth nations plus the United States.
By comparison the "civil law" system dates back to the Roman Empire, modernized by the French Code Napoleon and is accepted throughout continental Europe and its former colonies. The civil law is derived from explicit statutes with court precedents having a limited role.
Some civil law countries have enacted laws authorizing common law trusts within a civil law framework. There are many common law tax havens in which to settle a trust, so there is no need to consider the civil law havens for this purpose.
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WHAT DO TRUSTS HAVE TO DO WITH TAXES?
To begin with, money given to a trust when the settlor is alive (a living trust) may be subject to a gift tax, but not to heavy estate taxes and probate duties.
Thus, a living trust is often superior to a testamentary trust that is established by a will, because it avoids estate taxes and probate costs. Moreover, trust income is not usually taxable to the settlor.
Nor is it taxable to the trustee, who derives no benefits from its growth (except his fees and expenses, which are tax deductible expenses of the trust).
The beneficiaries, of course, cannot be taxed until they start receiving benefits.
In Canada, USA or UK, a trust itself is subject to tax on its own income.
But a trust located in a tax haven nation is not subject to tax and so can serve to reinvest all its income tax free, growing rapidly through this untaxed investment. Thus a tax haven trust can do for one's heirs what a tax haven corporation can do for one's self.
Tax haven trusts can be used in conjunction with tax haven corporations. Instead of owning a holding company that owns stock and other investments, one can be a beneficiary of a trust established by a foreign holding company to hold its own stock.
This and other double tier structures are important when home-country tax provisions come into play.
Remember that trusts, unlike corporations, are almost never publicly disclosed entities. No official public record of their creation is published. No audited accounts go to anyone except the settlor and/or his beneficiaries.
Such privacy allows decisions based on whatever considerations one chooses without unwanted publicity.
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Cayman Island History creates tax freedom today?
One of the most told stories in the islands history is the story of "The Wreck of the Ten Sails". Legend says that one night in November, 1788, the "Cordelia", the lead ship of a convoy of merchant ships bound from Jamaica to Britain ran aground on the reef at East End. A signal was given off to warn off the other ships, but was misunderstood as a call to follow closer and nine more ships sailed onto the reef. The people of East End are reported to have shown great heroism in ensuring that no lives were lost and legend further states that one of the lives saved was one of royalty. For this, King George III is said to have granted the islands freedom from conscription, while another report claims that freedom from taxation was bestowed on the people of the islands as a reward. Actual records do not support this story entirely.
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CORPORATIONS, TRUSTS: History & Purpose
