There are pressures affecting the global trusts sector but it is premature to see this as a sector in significant decline, this article argues.

The author of this article, Steve Carr, associate director at Hawksford, the global wealth structuring company. He asks: Where have all the trusts gone? With so many changes and regulatory pressures at work, it might appear that the trusts sector is shrinking. Is that true? This article considers what is going on. As ever, we invite readers to respond with their views. They can contact the editor at tom.burroughes@wealthbriefing.com

If we are to believe recent reports, the establishment of trusts is in decline. Admittedly, for UK residents in particular, changes to tax laws have made it less attractive to create a trust and it is quite rare these days for a trust to be set up purely with a tax motive as the main driver.

In an article published by the Financial Times in January, figures published by HMRC showed that the number of trusts required to declare their income declined by almost one fifth between 2008/09 and 2012/13 with the tax paid by trusts falling below £1 billion ($1.49 billion).

This begs the question, are trusts an outdated tool for meeting clients’ needs?

Prior to 1991 tax rules for overseas trusts were relaxed, making it very attractive to use trusts as part of clients’ planning arrangements. In just two decades, the increasing introduction of legislation around the use of trusts has resulted in most UK resident individuals being subject to income, capital gains and inheritance taxes on monies held in offshore trust structures. Major tax changes rolled out in 2006 and 2008 have arguably had the most profound impact in recent years.

Evolution in the use of trusts and the challenges created by tighter legislation combined with issues such as FATCA, have not only forced advisors to consider alternative structures, but also encouraged wealthy individuals and families to structure their wealth differently. This provides some explanation behind the fall in the number of trusts created in recent years

The publicity surrounding trusts use as part of tax avoidance structures, particularly in favourable offshore jurisdictions, have gone a long way to dissuade wealthy individuals from putting such structures in place. Although tax is no longer a driving factor, trusts continue to be a great tool for protecting family wealth. They enable comprehensive succession planning, greater privacy and anonymity, and greater efficiencies in the administration of multiple assets.  For this reason many of the world’s wealthiest people will turn to trusts as investment vehicles for a variety of asset classes such as businesses, property, fine art and yachts. 

As the world becomes smaller and families become much more internationalised, are trusts (in the traditional sense) really at threat? Or is it more likely that, in order to manage wealth on an international scale, different types of structures are required by high net worth individuals. This is very much illustrated by the increase in the awareness and formation of family offices, foundations and private trust companies

In all likelihood, trusts will form part of both a Family Office structure and Private Trust Company structure. In an ever more challenging world, clients’ attitudes towards wealth structuring and a growing wish to be more involved and retain/exercise control over their structures are key factors for consideration. We must also consider the simple fact that trusts were more ‘fashionable’ one or two generations ago. The “new generation” of HNW individuals and wealthy investors are perhaps more open and adaptable to alternative structures which offer increased flexibility.

Advisors and trustees have had to adapt their service offering to enable them to thrive on an international platform. This has led to many trust companies growing internationally through acquisition or expansion. In itself this will not immediately result in a firm being equipped to genuinely provide wealth management structuring for international families but will offer an advantage over a number of competitors. 

With an emphasis on ensuring that all advisors keep abreast of the changing landscape and with the world a more accessible place, there are many areas in which businesses can ensure that they continue to adapt to meet the evolution of wealth structuring. This includes working closely with colleagues and intermediaries in other jurisdictions and focusing on developing the international expertise and experience of staff.  

The impact of technological advancements cannot be ignored as this has made working across a number of jurisdictions almost effortless. It has enabled many jurisdictions, some which historically might have been viewed as having weaker trust laws, to demonstrate that they too can offer the same structures with, in some instances, alterations made to suit the need of a very different type of client.

So whilst we accept that trusts are no longer created with the same frequency or volume as they once were, it is not right to assume this is purely down to a decline in wealth structuring. Whilst trusts may not provide the same benefits they once did, now there are many more options available to international families which has broadened the scope of wealth structuring.