Offshore asset protection trusts are arranged in a way to ensure a separation of ownership between the assets and both the original owner and beneficiaries so that the trust can survive an outside challenge. To achieve this goal, it is critical that both the original owner of the trust assets and the beneficiaries give up a certain degree of control, and afford the trustee with true discretion in exercising their duties.

Generally, trusts are either beneficial or discretionary and either revocable or non-revocable. A beneficial trust will identify the beneficiaries and what the nature of their eventual ownership of the trust property will be. A discretionary trust, on the other hand, does not fix interest in the trust property, giving the trustee some discretion in deciding how, when, where and to whom the assets are distributed.

A revocable trust is one that can be "cancelled" by the Settlor before the trust property has been distributed. A non-revocable trust is one that permanently divests assets of the Settlor placed into it, with their eventual distribution to be determined only by the appointed trustee(s) and/or any applicable trust instruments (such as the trust deed or a letter of wishes).

In the context of an off-shore trust, where most of the benefits sought generally derive from the fact that ownership to the assets has been divested from the Settlor and the Beneficiaries, the trust itself will normally be non-revocable and discretionary. This is to preserve the appearance of non-control, by the Settlor and Beneficiaries, over assets that have been placed into the trust.

Quite simply, if the Settlor still has control over the assets through the power of revocation or as the clear eventual Beneficiary, many jurisdictions would deem those assets to be owned by the Settlor for all intents and purposes. Similarly, if there was only one Beneficiary and the Trustee had no discretion in distributing trust assets (nobody else to potentially give them to), then the Trust Property may be deemed as income to the Beneficiary in his resident jurisdiction, despite not yet having been distributed.

Most individuals considering an offshore strategy are reluctant to transfer property to the control of trustees because they fear they will lose that property forever. This is understandable in light of the degree of control that must be conceded in order for a contemporary offshore structure to maintain legal integrity. Thus, while there are many who like the idea of a trust, they typically wish to continue to exercise effective control over the trust assets despite the transfer to the trustees.

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.

Nevertheless, there are devices which may be used to give some degree of comfort to an individual considering placing assets in an offshore trust structure:

When setting up a discretionary trust it is common for the settlor or a designate to indicate to the trustees by letter or otherwise how they would prefer those assets be dealt with in a very general way. 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 other way.

 

It is possible for a protector to be appointed who exercises some degree of control over the trust property. It is generally 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. 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.

It is not unusual for a trusted friend, family relative or professional adviser of the trust assets original owner to be appointed as the protector, but it is becoming increasingly common to use the services of a professional trust company. This is because the jurisdiction of the trust can be called into questions if it is ever asserted that the protector exercises all the powers and discretion of a trustee.

 

Greater flexibility and control can sometimes be achieved by placing trust assets into an offshore corporation, whose shares are owned by a suitable trust. The original owner of the trust assets, or an appointee, may act as the manager 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 will also allow the company manager access to some trust property if they incur expenses in their capacity working for the company.