It is not correct that trusts once set up cannot be revoked. Trusts can be made revocable but this usually has tax, estate duty, asset protection and stamp duty disadvantages. Revocability is a matter to be discussed when the terms of the trust are considered.
(2) Loss of control of property
Many potential settlors are reluctant to transfer property to trustees because they fear loss of control over that property. In other words there are many who like the idea of a trust but wish to continue to exercise effective control over the trust assets despite the transfer to the trustees. However, careful planning together with an understanding of the fundamental legal requirements of a trust is required if the trust is to remain valid. If too much control is retained over the assets there is a risk that the trust will not be effective and the person who set up the trust will continue to be regarded by the law as the owner and all the advantages of having the assets held in trust may be lost. In particular, a court may force a Settlor to exercise any control he retains in a particular manner thereby negating any asset protection advantage which would otherwise have existed. Despite this there are devices which may be used to give comfort to a Settlor:
(a) Letter of Wishes
When setting up a discretionary trust it is common for the Settlor to indicate to the trustees by letter or otherwise how the Settlor would have dealt with those assets if he had retained the necessary control. Such a letter will not be binding on the trustees, and therefore has no adverse consequences, but in practice most reputable trustees would be reluctant to deal with the trust property in any way other than that suggested by the Settlor except, for example, where a change in circumstance or other matters suggests it is clearly disadvantageous to the beneficiaries to act in that manner.
It is possible for a protector to be appointed who exercises some degree of control over the trust property. In our opinion, it is unwise for the protector to be given anything other than negative powers as this may mean that the protector is considered to be a quasi-trustee and negative consequences may result especially when the protector is resident in a high tax country. Thus, for example, the protector’s powers should be limited to vetoing the decisions or actions of the trustees rather than having power to force the trustees to act in any particular way. For example, the trust deed may stipulate that no distribution from the trust can be made by the trustees without the consent of the protector but the trust deed should not give the protector power to instruct or force the trustees to make a distribution. The need for the protector to be consulted are structured without a protector being appointed. It is usual for a trusted friend, family relative or professional adviser of the Settlor to be appointed as the protector but it is becoming increasingly common to use the services of a professional trust company to act as protector. For this reason our own organization offers to act as a professional protector where we are not retained to act as trustees.
© Two Tier Company and Trust Structure
Greater flexibility can sometimes be achieved by having the underlying assets owned by a company whose shares are owned by a suitable trust ‑rather than having the underlying assets owned directly by the trust. The Settlor, or an appointee of the Settlor, may act as the director of the company and may therefore exercise day to day control over the underlying assets with minimal interference or need to refer to the trustees. This two tier structure may have tax and other disadvantages where the director of the company is resident in a high tax country but can be used to good effect in certain circumstances.
(d) Joint Trustees
There is no reason why a trust could not be structured so that there are joint trustees with the agreement of both trustees being required in order to take any action. The second trustee may be the Settlor himself, or a corporation controlled by the Settlor. Again, there may be negative tax or other consequences resulting from such a structure or if the Settlor is resident in other than a low tax jurisdiction but this is a solution worth considering. Alternatively, a check and balance may be obtained by having two different professional trust corporations acting as joint trustees. This can be cumbersome and expensive but may be suitable for certain trusts.
(e) Self Administered Trust Companies
It may be possible for a Settlor to establish his own trust company which acts as trustee of his trust. If tax savings are a primary motive for establishing the trust this will rarely be a suitable solution except in cases where the Settlor and his family are resident in an offshore or low tax jurisdiction, but may be a possibility where the tax considerations are irrelevant. Correctly structuring the ownership of the trust company can often be problematical so this structure has yet to gain widespread popularity but may be worthy of consideration.
(f) Hybrid Companies
A hybrid company is a company which is limited by shares and guarantee and therefore has both shareholders and members. The directors and shareholders control the company but have no rights to receive benefits. The members have no control but hold the rights to benefit from the company assets. Thus the shareholders are analogous to the trustees and the members are analogous to the beneficiaries. The “Settlor” transfers assets to the company but retains the shares and makes his family the members. In this way he can pass on benefits without losing control. With this solution problems can arise upon the death of the shareholders as, unless great care is taken, there ceases to be an effective way of administering the company. The ideal solution is to place the shares under the control of a suitable trust company but, of course, this will result in no more controls for the “Settlor” than he would have using a traditional trust structure.
Many believe that the costs of running a trust are prohibitive. Whilst it is true that many of the major banks and other financial institutions will make hefty charges for setting up a trust and will then expect to receive a percentage of the trust assets in annual administration fees, the level of fees charged by the smaller independent trust companies are generally much more reasonable and make the advantages of setting up a trust available to those with even relatively modest estates. Independent trust companies are also able to offer a more personalized service and also benefit from the fact that they are truly independent and can therefore select the best investments for the trust without being under pressure to place trust money with their own in-house investment advisers — see the section entitled “Accountability of trustee” for further explanation on this important point.