Trust and its Purpose
Anti-money laundering (AML) compliance information related to financial businesses is often centrally located and easily accessible. If you are in an industry related to non-financial businesses, you may have found it quite difficult to find applicable information. Designated non-financial businesses and professions (DNFBP), which essentially includes all non-banking businesses, such as Casinos, Real estate agents, Dealers in precious metals and stones, Gatekeepers (such as Lawyers, notaries, other independent legal professionals and accountants excluding internal professionals), and Trust and Company Service Providers. While some jurisdictions may classify Trust providers as a financial institution, relevant information is more widely available under the umbrella of DNFBP. In the past few years, I’ve gained an appreciation for the DNFBPs and the continuous need for guidance. It is, however, essential to understand the business. As I recently did a study on trusts, here’s a breakdown of the revolution of trusts as I understood it.
An unexpected event in history interestingly led to the origination of trusts. Trusts were established to combat the issues faced by landholders in medieval times circa 12th century. The gap that existed within the common law structure of that era forced the application of the “use”. The tool existed to protect persons under common law who relied on another for land obligated for their benefit. In circumstances where the landholder wished to prevent the transfer of his land to the crown or under inheritance rule, the need to transfer land to another party became necessary. A solution arose out of the issue where the legal title to land requiring transfer to another person leading to the use of the land remaining with the original owner of the land. The solution would be the process of surrendering the land to the lord of the land first, who would give use of the land to the person holding the land in trust for another. As the user of the land, the problem was not resolved in full by the “use” as the lord now owned the land. Eventually, by 1873, trust rules were established in law to address the concerns arising from the original problem and those concerns that emerged from the application of the “use”.
According to Re Astor’s Settlement Trusts [1952] Ch. 534 at 541, a trust can be defined as the legal owner of the property is constrained by a court of equity so as to deal with it as to give effect to the equitable rights of another[6]. There are countless resources since 1952, attempting to simplify the definition of a trust. To date, a clear singular definition of a trust appears to remain absent, and the collection of definitions are relied on as the need to apply arises. Beyond the attempt of defining a trust is also the task of classification of a trust. Trusts fall into a bare or simple trust in contrast to a special trust. One must also consider fixed versus discretionary trust, public versus private trust and implied versus express trust. The most complex types are between an implied trust and an express trust. Unlike an implied trust created by an operation of law, an express trust has the primary distinction of arising out of intention on the part of the person wishing to create a trust. Note that according to Halsbury’s Laws of England, an express trust may also have implied terms enveloped in the instrument or declaration by enactment or otherwise strictly relied on by parties to the trust arrangement. Nevertheless, an express trust, irrespective of implied or expressed terms, is established based on intention. Matters are complicated further regarding the purposes and structures on which trusts may be created. The ingenuity of practitioners creates express trusts in the form of pension trusts, unit trusts, offshore trusts, Special Trust (Alternative Regime) (“STAR”) trusts and charitable trusts, just to name a few.
The original intent of a trust or the original construct "use" was not established with the purpose of concealment. In various ways, these tools were devised to assist those who needed to rely on another for fiduciary obligations. The modern necessities of a trust still hold a degree of consistency with its original purpose. The uses of trusts are often sought by high net worth individuals to preserve their wealth in life and ensure that assets held by the trust are disposed of in accordance with the original wishes of the settlor. Additionally, trusts are established to seek to optimize legislative allowances for tax avoidance where the need arises such as transfer of property between spouses or civil partners.
Hereafter, the trust most often recognized today is the express trusts.
It is important to understand the role of trusts and the viability of trusts today, especially as a person specializing in trusts or reviewing trust-related matters. As a regulatory compliance consultant, it has proven useful to be able to understand structures that have an element connected to trust ownership.
