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.