Post by Yonathan Arbel
The recent leak of the Panama Papers exposed the public to the magnitude of assets held in offshore accounts. These accounts are often associated with motives such as tax evasion and asset shielding from creditors, although they may be more legitimate motives to locating one’s assets offshore, such as privacy or preference for the rules of a specific legal system. The estimates of how much is stowed offshore vary significantly, from one to five trillion dollars, an interval so large that it mostly reveals our ignorance. We simply know too little about these accounts, their motives, structures, and value—which, from the viewpoint of those who designed these trusts, is a feature, not a bug. The most comprehensive work to date on the topic is that of Professors Sitkoff and Schanzenbach, who studied U.S. institutional trustees. However, these trustees are not likely representative of offshore trusts, and so, our understanding of offshore trusts is still foggy.
In a new intriguing paper, forthcoming in the Hastings Law Journal, Adam Hofri-Winogradow is providing us with a glimpse into the clandestine world of onshore and offshore trusts. Hofri used a combined qualitative methodology of surveying and interviewing providers of trust services. Overall, he surveyed 409 providers of trust services and interviewed 25. Of his many findings, I will highlight just a few.
- Settlors are not limited to the1%. Most of the settlors’ wealth was estimated to be between 1/2 to 10 million dollars. While it is unclear how wealth was estimated, seeing that the average house is valued at around 0.3 Million, it is not surprising that settlors are not all 1-percenters, and belong to a much broader top 15% in terms of wealth—less rich than one might assume, although still undeniably wealthy.
- Small Competitors. Offshore activity is focused in Jersey and Cayman Islands, with Guernsey and British Virgin Islands at close third and fourth places. These competitors represent small countries which are unlikely to be amenable to traditional trade pressures, thus limiting the potential effectiveness of Piketty-like international cooperation.
- Demand for Perpetuity. In Hofri’s sample, 35.9% of all trusts, and over 50% of those situated offshore, were designed to last for more than a century. I find this especially interesting because a large part of the objection to perpetuities rests on the idea that perpetuities will not serve the long-term interests of the settlor—that the change of times and social norms will frustrate the goals of the settlor. But in fact we find that there is strong demand for such instruments and that those who use them are undeterred by the prospect that a future court may reinterpret their stated desires.
- Asset Shielding is Alive and Kicking. The most important finding from the perspective of asset shielding is that trust providers estimated that most of their trusts contain anti-creditor mechanisms. This is important because, as I previously discussed here, asset shielding creates credit market distortions. In Hofri’s sample, asset shielding was most common with American trust providers, although it is unclear what drives the differences between American and non-American providers. Suspicious of the traditional argument that such protections are used to protect financially improvident beneficiaries, Hofri inquired about the profile of beneficiaries. He found no indications that would set the beneficiaries apart from ordinary individuals, at least from a financial literacy perspective. This further suggests that the asset shielding motive is an important reason for using trusts.
The study’s limitations are fairly obvious. Hofri’s survey yielded a 1.7% response rate, which is generally considered as being very low and his choice of interviewees did not follow a clear selection process. Furthermore, the qualitative approach makes inter-subject comparisons harder, and the interpretation of some of the answers may require a richer understanding of context and jurisdiction. However, as someone who has engaged himself in this type of qualitative investigation, I do not find this especially troubling. While the limitations suggest caution when drawing policy prescriptions, we hardly know anything about this world, and Hofri’s investigation provides the best data we have on many of these questions. Future studies—perhaps with the sponsorship of governments—might be able to acquire a more quantitative sense of the phenomenon, and the data Hofri gathered should hopefully motivate such an investigation.