Let's Dispel Some Trust Myths

In my last post I explained how family trusts actually work, and that the issue is one surrounding taxation; not the trust structure per se.

In this post, I explain why people saying trusts do more harm than good is deeply ignorant.

Firstly, from an international investment perspective, various jurisdictions (including Singapore and Hong Kong) have implemented laws liberalising their trust structures to make them more attractive for international investors, and thus draw greater wealth into their economies (in terms of fees regarding the creation and administration of such trusts): see here. These economies are highly sophisticated and would not alter their trust laws in such a way if they thought they weren't going to do well out of it. They see value in the trust; it's odd that we don't at the moment.

Secondly, the various evil ways that trusts are used equally apply to companies. For example, Dale Boccabella has stated that:

"There are a few other ways discretionary trusts are used. They are also used to frustrate creditors, people who are owed money by the beneficiaries of trusts.

Someone who is owed money by a beneficiary of a trust can’t go to the trust to settle their debt. This is the case even if the beneficiary has received money from the trust in the past and is likely to receive money in the future, after release from bankruptcy (having not paid their debts)."

Yes, but that's also true of a company. Indeed, what is seemingly forgotten is that part of the reason we have the modern company structure is because of the way businesses used the trust structure to achieve limited liability, which is often regarded as one of the great hallmarks of modern business, and what allowed commerce to flourish in recent centuries. So, why aren't we abolishing companies?

Lastly, a lot of the benefit of the trust structure can be replicated through a combination of contractual arrangements that would give rise to agency and bailment obligations. There's no possible way to police such arrangements, and if you took away the trust, that is exactly what people would have their lawyers create. At least trusts have to be registered with the ATO; and even if people are using them to legally minimise their tax, then the government can know about it.

Governments have tried to abolish the trust structure going back to the time before Henry VIII, and even his most famous effort, the Statute of Uses, was unsuccessful. There is a social desire for such a structure that divides the legal and beneficial ownership of assets, which has existed long before taxation ever became an issue. Recent calls that focus on this are therefore ignorant of the trust's history, its actual structure and overall functions.