Give the People What They Want? The Onshoring of the Offshore

• Author: Lionel Smith
• Position: Sir William C. Macdonald Professor of Law, Faculty of Law, McGill University
• Pages: 2155-2174

Give the People What They Want? The Onshoring of the Offshore Lionel Smith * I. INTRODUCTION ........................................................................... 2155 II. THE IRREDUCIBLE CORE OF THE TRUST ..................................... 2156 III. THE OFFSHORE STORY ................................................................ 2158 IV. THE ONSHORING OF THE OFFSHORE .......................................... 2159 A. D ECISIONS OF O NSHORE J UDGES ............................................. 2159 B. R ECOGNITION OF F OREIGN T RUSTS AND C HOICE OF L AW ......... 2163 C. O NSHORE L EGISLATION ......................................................... 2166 V. SHOULD WE GIVE THE PEOPLE WHAT THEY WANT ? .................. 2167 A. W HAT I S THE P OINT OF T HESE O LD R ULES ? ........................... 2167 B. C OMPETING W ITH THE O FFSHORE ? ........................................ 2172 VI. CONCLUSION .............................................................................. 2174 I. INTRODUCTION My lecture today is about the limits of freedom of choice in trust law. Trusts are magnificently flexible, and this has been one of the strengths of the trust institution since its origin in the middle ages. But trusts are not infinitely flexible. A trust has a certain logic to it, and there are aspects of this logic that are not susceptible to freedom of choice, except perhaps in a particular form which I will illustrate with a story. * Sir William C. Macdonald Professor of Law, Faculty of Law, McGill University. This is a revised version of the 2017 Tamisiea Lecture in Wealth Transfer Law, given at the College of Law, University of Iowa on 8 September 2017 as part of the Iowa Law Review /ACTEC Symposium on “Wealth Transfer Law in Comparative and International Perspective”. I thank Professor Thomas Gallanis for the honour of the invitation. For their hospitality, I express my gratitude to Professor Gallanis, the members of the Iowa Law Review , the ACTEC Foundation, and the College of Law. This research is part of a project on Conflicts of Interest and Fiduciary Obligations, funded by a Killam Research Fellowship during 2014–2016. I acknowledge with gratitude the support of the Killam Trustees. 2156 IOWA LAW REVIEW [Vol. 103:2155 I once found myself travelling on an aircraft at the time when the flight attendants were serving a meal. They start at the front and work their way back. I could hear them, as they approached, asking other passengers, over and over: “Would you like chicken or vegetarian?” But sometimes they run out of one thing or another. When they arrived at my row, the attendant offered a meal to my neighbor, and said, “Sir, the meal is a vegetarian pasta dish.” The passenger replied, “Isn’t there a choice?” The flight attendant— who, I can only assume, was having a bad day—paused, and said very deliberately: “Yes sir, there is a choice. You can take it, or you can leave it.” No one has to choose a trust. But there are some things that people want to do with trusts that may attract the same answer as that given by the flight attendant. There are some things that you cannot do with a trust, and if you want to do them, you will have to find some other way. Although trusts are flexible, this is only up to a point. 1 In recent decades, the offshore jurisdictions of the world have made a business of responding to what people want. They have done this through low rates of taxation, but also through the provision of legal institutions that do not exist in other places. 2 And now some of these institutions are appearing onshore, in places like Alaska and Delaware. 3 My lecture sounds a cautionary note in relation to these developments. I believe as much as anyone in freedom of choice. But I also believe that the rules of private law reflect important truths about interpersonal justice. We are responsible for our actions, and the law reflects this. The law should reflect this. When the law does not reflect this, we need to ask why. It is the exception, not the norm. Every normative order contains exceptions, but by their nature, exceptions are exceptional. They need to be justified. II. THE IRREDUCIBLE CORE OF THE TRUST The trust is so flexible, as a legal institution, that Professor John Langbein, in a 1995 article, famously compared it to a contract. 4 But in later writing, he explored the limits of the trust’s flexibility and what might be called the mandatory part of trust law. 5 In the Commonwealth this is often called, after a famous article by David Hayton, “the irreducible core” of the 1. EVELYN WAUGH, SCOOP ch. 3 (1938). 2. Some examples will be given in Section III. 3. Some examples will be given in Section IV.C. 4 . See generally John H. Langbein, The Contractarian Basis of the Law of Trusts , 105 YALE L.J. 625 (1995). 5 . See generally John H. Langbein, Mandatory Rules in the Law of Trusts , 98 NW. U.L. REV. 1105 (2004) [hereinafter Langbein, Mandatory Rules ]; John H. Langbein, Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments , 90 B.U. L. REV. 375 (2010) [hereinafter Langbein, Rembrandt ]. 2018] ONSHORING OF THE OFFSHORE 2157 trust. 6 The idea of the irreducible core is that if you do not have it, you don’t have a trust any more. You have chosen not to take it, but to leave it. The late Justice Scalia once said, in a concurring opinion, “A trust without a res can no more be created by legislative decree than can a pink rock-candy mountain.” 7 A trust must have trust property; that is part of the irreducible core. There is a lot of debate about what exactly belongs to the irreducible core. Professor Langbein takes the view that a trust must benefit the beneficiaries, or it is not a trust. 8 That widely held view seems sensible. The core of the common law trust is the obligation owed by the trustees to the beneficiaries concerning the benefit of the trust property. It follows from this that the trust must benefit the beneficiaries. The irreducible core is one example showing that although the trust is flexible, it is not infinitely malleable. Langbein invokes these principles to explain why U.S. courts have frequently modified trust terms that restricted trust investments, often restricting them to holding shares in a corporation that was the settlor’s creation. 9 Having all your eggs in one basket is very risky, and that does not benefit the beneficiaries. The same is true when a settlor tries to restrict beneficiaries’ rights to information. 10 If the beneficiaries did not have that right, the trustees’ obligations to the beneficiaries would be illusory. In these settings at least, benefiting the beneficiaries is more important than respecting the settlor’s wishes, and when those things collide, the settlor’s wishes have to yield. This is a very important feature of the trust and helps us to think about the traditional rule that there is no such thing as a non-charitable purpose trust. 11 A trust for purposes has no beneficiaries in the normal trust law sense. People may benefit of course; this can be illustrated by thinking about charitable trusts, which are purpose trusts. Consider a charitable trust for the promotion of education. People may get benefits and be thought of as beneficiaries in a loose sense. But they do not have the trust law rights of beneficiaries: to be informed, to demand an accounting of what has been 6. David Hayton, The Irreducible Core Content of Trusteeship , in TRENDS IN CONTEMPORARY TRUST LAW 47, 47–49 (A.J. Oakley ed., 1996). 7. Begier v. I.R.S., 496 U.S. 53, 70 (1990) (Scalia, J., concurring). 8 . See Langbein, Mandatory Rules , supra note 5, at 1120–23. 9 . See id. at 1111–17; Langbein, Rembrandt , supra note 5, at 385–95. 10. Langbein, Mandatory Rules , supra note 5, at 1125–26. A decision of the Court of Appeal of Bermuda confirms that in the absence of legislative authority, the common law does not accept a trust in which only a protector, and not the beneficiaries, have the right to information about the trust: In re Application for Information about a Trust , [2013] CA (BDA) 8 Civ (Berm.), available at https://www.gov.bm/sites/default/files/CA1402_in_the_matter_of_a_trust__evans_.pdf. I thank Adam Hofri-Winogradow for this reference. 11. The principle is discussed in all texts on trust law. For U.S. law, see 2 AUSTIN WAKEMAN SCOTT ET AL., SCOTT AND ASCHER ON TRUSTS § 12.10 (5th ed. 2006); RESTATEMENT (THIRD) OF TRUSTS §§ 44, 47 (AM. LAW INST. 2003). The traditional rule has now been changed in some states of the United States; we will return to this in Section IV.C. 2158 IOWA LAW REVIEW [Vol. 103:2155 done with the trust property and how it is held, to enforce the trust, to sue the trustees for breach of trust. Those rights belong to beneficiaries in the strict sense, and a pure purpose trust has none. So, if it is part of the mandatory core of trust law that a private, non-charitable trust must benefit the beneficiaries, it is not surprising that, traditionally, it is not possible to create a non-charitable purpose trust, that is, a private trust without beneficiaries. We will come back to this. III. THE OFFSHORE STORY The rise of the offshore is a relatively recent phenomenon, dating from the 1960’s or perhaps the 1970’s, depending on the commentator. 12 The part of it with which I am concerned is not offshore finance, nor the low or nonexistent tax rates that have led to the term “tax havens.” As a trust lawyer, my focus is on the practice of legislative reform that offshore financial centers have engaged in as part of a drive to attract wealth, usually in the interests of creating local jobs or, more generally, improving the local economy. 13 The law of trusts is found all over the world—at least, all over the common law world, and increasingly in other legal systems as well. If you are trying to give people a reason to send their money away, far away from where they live, you have to do better than provide the...