The writers look at how draft UK legislation over entities such as digital assets will affect modern trusts, advisors and trustees.

The following article on how trusts fare in today’s world is very timely, given how much change there has been. The authors are Joanna Poole, partner, and Henrietta Mason, senior counsel (both pictured below), at Farrer & Co. The usual editorial disclaimers apply to views of guest writers. The editors are pleased to share this article to stimulate debate. To respond, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Joanna Poole

Henrietta Mason

The institution of the trust remains one of English law’s most valuable contributions to jurisprudence. At its most basic level, a trust permits the separation of the legal ownership of an asset (held by the trustee) and its beneficial ownership (held by the beneficiary). Historically, trusts were used by medieval knights as a means of safeguarding and managing their estates whilst away on crusade, but across the subsequent centuries the trust has proved to be a versatile mechanism for the purposes of wealth protection, estate planning, asset management, charitable giving, and as a means of navigating changing social and political landscapes. 

A central requirement for the validity of a trust is that the subject matter of that trust must be certain; namely specifically defined or capable of being ascertained. The classes of assets held on trust have changed considerably over time.  

Where trusts were once upon a time set up to hold tangible items such as property, grain, wine and livestock, the development of financial markets resulted in new asset classes emerging. Cash, bank accounts, stocks, bonds and other securities could be settled on trust. Recently, following rapid technological advancements, a digital asset class has emerged, including for example crypto-tokens, non-fungible tokens, stablecoins, security tokens, and so on. Increasingly, trustees, practitioners and the courts are considering how these fit within our long-established trusts law.  

In this article we consider how the draft Property (Digital Assets etc.) Bill, which is currently at Report Stage in the House of Lords, will have a positive impact on handling modern trusts and offer practical guidance for trustees and wealth advisors.  

Behind the times
Traditionally, the law of personal property in England and Wales has been split into two categories:

1. Things in possession (generally, tangible things such as paintings, furniture); or
2. Things in action (personal property that can only be claimed or enforced through a court action, such as a debt or contractual right).

Digital assets may not fit easily into either traditional category. Crypto-tokens, for example, are digital representations of value or rights, that exist on a blockchain, such as that used by Ethereum. They can neither be physically possessed, nor is their existence dependent upon their recognition by a legal system or claims made in relation to them. 

This creates considerable uncertainty for trustees and for settlors. How can a trust be declared over such assets, and how can they be clearly identified and managed within a trust where their legal status is in question? Whilst there have been cases in the High Court which have found that certain digital assets can be classed as personal property under English law, even if they do not fit within the two traditional categories, there remains uncertainty due to historic cases which suggested that the traditional two categories of personal property were exhaustive.  

A welcome evolution
In light of this uncertainty, the Law Commission in England and Wales has published a bill, The Property (Digital Assets etc) Bill, which confirms that certain digital assets can attract property rights even if they do not fit into the two traditional categories. The bill does not state what digital assets fall within this “third category” of personal property rights, nor how they will be treated under the law – these details will be developed by the courts as has always been the case with categories of personal property – but, if enacted, the bill has the potential to bestow upon digital assets the same protections as other traditional categories of personal property. 

In effect the bill “unlocks” the development of the common law in this area, to give the courts the flexibility to develop the law as asset classes continue to emerge. Whilst, therefore, different asset classes will still need to be tested in court, over time we should begin to see greater certainty as to which types of digital assets are afforded the protection of the law and whether these assets can be included within trusts.  Accordingly, trustees will be able to ensure that such assets are properly managed and distributed according to the terms of the trust.  

Playing an active role
Whilst this additional clarity is a welcome development for trustees, settlement of digital assets of course presents ongoing challenges. The pace of change itself is a challenge, particularly as it is hard for the law to keep up with such a rapidly-evolving area. In terms of trust administration, as a matter of practice, trustees may prefer to use a custodian to manage crypto assets within a trust. Custodians will have the in-depth technical expertise to deal with these assets effectively in terms of record keeping, reporting and transaction processing. They can ensure that crypto assets are managed in compliance with regulatory requirements and securely stored using security measures such as multi-signature wallets and cold storage to protect against fraud and hacking.  

Nevertheless, even if using a custodian, trustees will inevitably need to be proactive to ensure that they stay abreast of the rapidly-developing technologies, and, of course, the legal advances in this area, to deal with these assets effectively in the trust administration.  

(With thanks also to Edward Everett, trainee solicitor, for his support producing the article.)