Friday, September 8, 2017
To finish up the day, Professor Lionel D. Smith of the McGill University Faculty of Law gave the Tamisiea Endowed Lecture in Wealth Transfer Law. His presentation, titled Give the People What They Want? The Onshoring of the Offshore, was about challenging the growing flexibility of trust law in on- and off-shore jurisdictions. Smith explained how offshore jurisdictions have tried to create flexible trust laws to meet client demands related to freedom of choice. Indeed, some of these new institutions have even been adopted in “onshore jurisdictions.” Smith noted that although freedom of choice is important, private law plays an important policy-balancing role in society.
Professor Smith stated that the offshore trust phenomena is a relatively new concept whereby legislatures enact or modify trust law in order to entice high net-worth individuals to migrate their wealth to these locales. For example, the Cayman Islands created the STAR trust and the British Virgin Islands created the Vista Trust—both aimed at drawing in the trust industry.
Smith explained that the there is an interaction between onshore and offshore trust law - “onshoring of offshoring.” One way this occurs is through how onshore judges interpret these offshore trust laws (like New Zealand judges hearing Cook Island trust disputes). For instance, he described a UK court with jurisdiction over Cayman Island disputes upholding an offshore asset-protection trust but making the debtor’s power of revocation a seizable asset (which the creditor could then exercise itself to get at the trust assets).
Smith explained that another way interaction happens deals with conflicts of laws principles, such as when a common law trust dispute would end up being litigated in a civil law court where trusts are not recognized. Smith also explained, by way of example, that with a star trust the beneficiaries have no right of enforcement—rather enforcement is left entirely to the trustee. Such a state of affairs does not (and cannot) exist under UK trust law.
The final way offshore innovations come into contact with the onshore is more direct—when onshore jurisdictions change their laws to reflect offshore conventions. An example of this is the abolition of the rule against perpetuities and the way several US states have created asset-protection trusts of their own.
Smith concluded by asking whether we should we concerned about onshore jurisdictions enacting these client-centered, off-shore trust concepts. “Should we give the people what they want?” He argues that, we cannot design the legal system around clients – there is more at stake. For instance, with a non-charitable purpose trust (although perhaps sometimes motivated by settlors who truly seek to do no harm) one creates a fund of property that is essentially unowned. Thus, the property is beyond a creditor’s reach yet functionally still under the control of the settlor. Here, as with the Star Trust under Cayman law, the trust obligations can only be enforced by the enforcer (the trustee), which the trustee can choose not to do.
In closing, Smith noted that although these statutory innovations were designed as a competition tool between offshore jurisdictions—onshore jurisdictions are now doing the same thing. He stated that in a race to the bottom, you give up a great deal. For instance, the Bahamas recently passed an executive entity trust whereby a legal person with no shareholders and no assets is created but which cannot incur liability for its actions—all done to create a customized creature to serve the purposes of a client. Smith finished by noting that by giving “the people” (the trust industry) what they want, we—in the longer term—give up so much more.