How do trusts work?

Trusts can be abused to shield the identity of owners of wealth and muddle the status of ownership for the purpose of paying less tax and escaping the rule of law. Trusts have increasingly become one of the most important mechanisms used in modern global finance.

Trusts are most often used to facilitate a transfer of an individual’s wealth in circumstances in which they can no longer do so themselves, for example after their death. A parent might store their wealth in a trust that pays out monthly allowances to their child until the child becomes old enough to take ownership of all the money and assets held by the trust that their parent left behind for them. A wealthy entrepreneur might leave their fortune to a trust dedicated to funding charitable causes. However, with governments increasingly clamping down on the avenues tax abusers use to hide their wealth, trusts are being increasingly weaponised to abuse tax and commit financial crimes.

Trusts allow the ownership of wealth and assets to be temporarily suspended. The wealth held by a trust no longer belongs to their original owner (the settlor), nor to the person receiving benefits now or in the future from the trust (the beneficiary), nor to the person tasked with managing the wealth on behalf of the settlor until the beneficiary assumes full control of the wealth held by the trust (the trustee). Tax abusers are using this suspended status of ownership offered by trusts to hide their ownership of huge fortunes and expensive assets like mansions and companies, while they continue in practice to benefit from and to exercise full control over their money, their mansions and their companies.

For instance, although the settlor has supposedly been separated from the asset, they may still through retain control over the asset through a secret “letter of wishes”. A settlor may give ownership of mansion to a trust, but continue to live in it along with the beneficiaries. A settlor may put a large sum of money in a trust, only then to have the trust give them a loan that is never repaid. Tax havens specialise in facilitating this kind of complex skulduggery. Discretionary trusts, which are especially good at this kind of manipulation, are especially common types of offshore trusts, and they alone are responsible for trillions of dollars’ worth of assets sitting in a an “ownerless” limbo.

Governments must require trusts to register their beneficial owners just like companies do. Learn more about beneficial ownership here.