Although trusts have endured through the centuries into the modern age, they have recently fallen victim to intense political and regulatory pressure. At the Legal Week Private Client Forum the question was asked whether trusts have finally had their day. John Malpas reports

Trusts date back to the Middle Ages and continue to form a vital part of the modern private client lawyer's armoury. But has this durable common law legal structure finally had its day thanks to the global crackdown on tax avoidance and banking secrecy that has followed the credit crisis?

At the Legal Week Private Client Forum, which was held at Lake Como in Italy last November, two leading barristers locked horns on the future of trusts, which have come under heavy political and, in some cases, judicial fire in recent years. 

The protagonists were Christopher McCall QC of Maitland Chambers, and Shan Warnock-Smith QC of 5 Stone Buildings in the UK and ICT Chambers in the Cayman Islands, with McCall agreeing to speak against the motion that 'This house believes trusts are able to play an important role in wealth and succession planning well into the future'.

The debate took place against the background of ongoing hostility towards the world's offshore centres by Western governments keen to both shore up their finances and – at least according to the advocates of offshore finance – divert public attention from their own shortcomings.

Last spring the reverberations from this clampdown reached the Supreme Court, much to the alarm of many private client and trust lawyers. In a judgment delivered in May – in the cases of Pitt v HMRC and Futter v HMRC – Lord Walker warned that the courts would take public policy into account when considering the merits of a trust structure designed to reduce the amount of tax paid.

The technical point hinged on whether a decision by a trustee made after receiving bad advice could be rescinded by the courts if the advice had led to the trust's assets attracting more taxation than would have normally been the case.

Lord Walker observed: "In some cases of artificial tax avoidance the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy."

Speaking at a conference session devoted to this judgment, Richard Wilson (pictured, bottom), of 3 Stone Buildings, gave his interpretation of its significance: "The court seems to be saying that 'if you play with fire and you get burnt, don't expect to come to the court get any treatment for it'. That is quite a worrying development because of the facts of this case. This wasn't artificial tax avoidance, it was just sensible tax mitigation. For this to be regarded as morally unacceptable is symptomatic of the view being taken by the court at the moment."

Deadly infection

It fell to McCall (pictured, above) to take up this thread during the debate on the future of trusts. And although this leading Chancery silk was obliged to take an extreme position to foster a healthy discussion, it was also clear that many of his observations came from the heart.

McCall argued that the worldwide drive by debt-burdened countries to raise more taxes signalled the death knell of the trust. He maintained that the trust structure had been abused by some advisers who had created exotic structures whose clear purpose was "aggressive tax avoidance". 

He added: "The good trusts – and there are good trusts – will go under with the bad. The trouble is that the bad trust has affected the herd as a whole, like a viral infection."

McCall cited the announcement by the Government last summer of plans to establish a public register setting out the true owners of companies in an effort to deter tax evasion. Although trusts are currently specifically excluded from these plans, he predicted they would soon be brought under the umbrella.

"The world has caught up with us and it doesn't like what we've been doing," he said. "The lack of transparency we have bred has come back to haunt us, while the ease with which we seem to use trusts to jump around the tax system infuriates the normal man who pays his taxes because he simply hasn't got a choice."

If nothing else, added McCall, trusts risked being taxed out of existence. "I think we are too late to turn back the tide and I'm very sad because I believe the trust is one of the greatest treasures of the English law."

Liberating landscape

Given the make-up of the audience, Warnock-Smith (pictured, right), who spoke for the motion that the trust had a rosy future, recognised that she would have a significantly more sympathetic hearing than McCall.

She said she found the landscape in which trust lawyers were now operating "curiously liberating", precisely because the worldwide clampdown on secrecy and tax evasion had set the legitimate parameters within which private client lawyers had to operate.

"What it means now is that private client lawyers, as well as accountants and bankers and so on, are liberated to do what we ought to be doing, which is to devise intelligent structures under which families can protect their assets, their fortunes and their lives. We are no longer under an obligation to avoid tax to the maximum possible extent – it simply won't work. 

"We can now say to our clients 'look we are simply not using that scheme because it will expose you to grave peril'. You must plan for transferring wealth to the next generation. You must plan for not avoiding those taxes you simply cannot avoid other than by adopting extreme schemes, and you must concentrate on developing intelligent structures for the handling of your wealth."

Warnock-Smith added that a sophisticated legal structure had grown up around international trusts under the supervision of various offshore courts. She maintained that while these courts would not support secrecy, they would respect confidentiality in the right circumstances.

And she concluded: "We have got a series of possible structures for use by clients that are properly controlled by experienced professionals with the tone set by the courts."

Nothing to fear

The motion received overwhelming support from the delegation. Nevertheless, there was a considerable amount of discussion at the conference about the future of the trust and, by extension, private client law.

The take of veteran lawyer Jim Edmondson on this issue is likely to be typical of many senior private client practitioners. "Virtually all estate planning in common law jurisdictions involves the use of trusts and some element of tax mitigation, or, at the very least, a need not to create tax liabilities where they do not already exist," says Edmondson, who is a consultant at Farrer & Co.

He readily acknowledges the increasing amount of international regulation that aims to curb money laundering and combat tax evasion. But, like Warnock-Smith, he believes private client lawyers who advise wealthy, law-abiding citizens have nothing to fear.

"The legal practice of those who gather at the Private Client Forum, for example, has never involved acting for the individuals who are increasingly targeted by the authorities. So aside from the inaccurate and emotional headlines in the press, which will go away when they find something else to talk about, there is little change in the way that such lawyers operate."

The Legal Week Private Client Forum 2014 will take place on 13-15 November at Villa d'Este, Lake Como, Italy. It will be chaired by Rupert Ticehurst of Berwin Leighton Paisner and Basil Zirinis of Sullivan & Cromwell. For more information go to www.privateclient-forum.com or email [email protected].

• Related: Legal Week Trust and Estates Litigation Forum 2014