The Stripping of the Trust: A Study in Legal Evolution

Abstract

The law of trusts has spent the last twenty years rapidly shedding many traditional requirements, forms and restrictions which imposed liability on negligent trustees, protected vulnerable beneficiaries and prevented the use of trusts to avoid the claims of settlors' and beneficiaries' creditors, including their spouses, their children, and their governments. This article studies seven aspects of this "stripping of the trust", examines its consequences from both a distributive justice and a corrective justice point of view, and inquires whether the resulting stripped-down model coheres with the traditional functionality of donative private trusts. I found that most of the current reforms have welfare-reducing distributive consequences, in some cases inflicting externalities on all except the parties to a given trust, in others transferring value from settlors and beneficiaries to the trust service providers serving them. Most of the reforms discussed also create potential for infringements of corrective justice which either did not exist, or was less significant, pre-reform. I conclude that all but one of the seven reforms I examine should be reversed.

Keywords: trust, trustee, settlor, beneficiary, protector, enforcer, jurisdictional competition, offshore, debtor, creditor, tax avoidance, tax evasion, negligence, exemption clauses, exculpatory clauses, equity, donative

JEL Classification: K11, K19, K20, K29, K30, K39