Asset Protection Myths

(1) Irrevocability

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.

(b) Protector

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.

(3) Costs

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.