The No Trust Industry
A few years back, an elderly lady, who had been married to her husband for 30 years, received a letter from a magic circle lawyer. The letter, it turned out, related to the family home, or at least what she thought was the family home. For it was revealed in the letter that the property was not in fact the matrimonial home, but was in reality owned by a company that was itself owned by a trust. What’s more, she was being served with notice to leave.
Crucially, her husband tried to claim that the house didn’t belong to him and an affidavit of means showed up nothing in his name. Coincidentally, however, a little digging revealed that he owned and directed the company trust structure, reserving all powers to himself. For all his duplicity, and efforts to use complex trust structures to deliberately conceal asset ownership, he might as well have painted a giant red target on his forward.
Aside from the shocking extent to which one man would go to deceive his wife, the salient point is that the case in question typifies the way in which trusts are all too often abused by those with questionable motives.
Increasingly it seems that few financial arrangements have less apt names than ‘trusts’, which routinely belie a total lack of harmony between trustee and beneficiaries, or between beneficiaries themselves. In short, trusts, particularly those offshore, can be exploited by those with something to hide.
This last point is instructive: ultimately what matters when lawyers are faced with the unenviable task of unpicking trust is the motive behind its formation, and that of its salesman. And with the recent rise in trust litigation, unpicking trusts is becoming increasingly common. Stones are being cast back, and the murky underbelly of the ‘trust’ industry exposed.
Historically, much of the litigation was, in no small part, down to the intrusion of the banks into trusts. Few good things begin with the banks, and to many banks, trusts represented a wonderful acquisition because it gave them a barrel of fish to shoot: all clients had to buy in-house products, and no client ever saw his trustee unless there was an investment banker present and off they went. This sort of approach always leads to litigation when the portfolio goes wrong or if somebody applies logical parameters to portfolio monitoring.
In-house products are rarely very competitive and they come with a series of hidden commissions and kick-backs. Thus we regularly found ourselves in the absurd position where, in order to increase profitability, the trustee’s parent would need to squeeze assets out of the trust, or may try to tie the trust into exclusive agreements by way of loans or investment advice. In the good old days, there were old fashioned trustees, who did not receive commissions of any sort from the investment advisers who were arm’s length third parties and a beauty parade was held to choose the adviser and then portfolio management was monitored accordingly.
Perhaps prudently, banks have started to abandon trusts, their fingers thoroughly burned by waves of litigation, typified by a recent lawsuit against UMB Bank for its mishandling of the Thomas Benton Art trust. For those in the sector, it may prove to be the calm before the storm as service providers are replaced by private equity as the ultimate shareholders.
The arrival of private equity cuts to the core of the problems facing the sector, namely that trust relationships itself has been entirely replaced by the profit motive. What we’re seeing now, however, with in private equity is that it prioritises short-term financial gain over longer-term fiduciary relationships. It goes without saying that cutting corners in order to squeeze as much revenue out of trusts as possible will generate disputes.
Wealthy men, and sometimes women, use trusts to protect the assets from business and family risks and to ensure asset devolution to another generation or simply to keep control whilst denying ownership will regularly often exploit trusts. This situation - where a trust exists as a wrapper for a patriarch’s affairs - is perfectly legitimate under certain circumstances if the Settlor wants to put a portfolio of investments into a trust, he may or may not have valid reasons for so doing. But, once again, they can be exploited by their trustees.
Inevitably, this type of trust is often beset by problems, including attacks by creditors and disappointed business partners, not to mention the routine actions against the trustee for mismanagement. Perhaps most notably, however, there has been a significant uptick in litigation by unhappy spouses against such trusts.
No example demonstrates the situation better than that of the wealthy husband, working in the offshore industry, who produced an affidavit of means claiming he had few assets to his name. Eventually, having been extensively surveilled, a credit card slip in somebody else’s name - a complete false identity which lead to a trust - was discovered in a bin outside the expensive French restaurant that he had been dining in.
All of these scenarios - be it exploitation by banks and private equity, or duplicity by husbands - point in the same direction: the need to return to traditional models of trusteeship. We need to restore trust, where trustees take their fiduciary duties seriously and settlors think carefully about the calibre and motivation of the human beings they are dealing with. Unless there is a shift, trusts will continue to be abused, and lawyers will keep on suing.