Owing to an increasingly challenging global landscape, settlors are turning to trusts for asset protection – but real care needs to be taken when setting up such a structure.
The global economic, financial and political landscape is arguably more uncertain than it has been for decades. From the wide-ranging, devastating impact of Covid-19 to international trade wars, heightened geopolitical tensions, rising inflation and evolving regulation, people around the world are having to navigate an extended period of volatility.
For high-net-worth individuals (HNWIs), this backdrop presents a host of challenges, not least the need to protect their assets against such uncertainty. Offshore trusts are typically a go-to wealth structuring option for HNWIs, but do they still hold their own in the current environment?
This was one of the questions asked in a recent Ocorian webinar – 'How to protect wealth against volatility through offshore trusts' – which also examined how trusts are coming under attack. Traditionally, such attacks may have been from creditors, disgruntled beneficiaries or divorcing spouses – but increased scrutiny of wealthy individuals means that government sanctions and interventions are also now a real threat.
"Asset protection is one if not the main concern of all our clients, and it's often the key rationale for establishing a trust," explained Ian Rumens, Head of Private Clients for Jersey at Ocorian – one of the panellists on the webinar. "But with the world as it is right now, it is more critical than ever to make sure that any trust is set up with very clear objectives in mind and to minimise the risk of volatility and any successful attack."
In an asset protection scenario, Rumens highlighted how a settlor should attempt to divest themself of as many of their substantial assets as they can. Thereby leaving as little as possible in their personal name for any potential attackers.
He pointed out a number of rules of thumb when it comes to establishing a trust for asset protection purposes. These included:
- The trust should be irrevocable
- If possible, the settlor should have no beneficial interest in the trust assets
- Ideally no powers should be reserved to the settlor – or as few as possible
- The structure should have no affiliation with the jurisdiction in which a claim might be brought, recognised or enforced
- The settlor should consider vesting supervision of the trust to a committee of protectors, which could include the settlor – but they shouldn't be the sole protector
- Consider splitting the assets so that some assets are not situated in the jurisdiction where the settlor (or beneficiaries if applicable) is resident
- Independent professionals should be appointed to act as trustee and administer/control the structure
The question of control
In reality, getting a settlor to vest all control of their assets as well as the management of the trust in a trustee, is often easier said than done. Suzanne Johnston, Partner, Stephenson Harwood in Singapore, explained how this could be particularly difficult in certain countries or within specific cultures.
"If you say to clients in Asia that they can't have any control in relation to the trust, then the vast majority will not be interested in setting up the trust in the first place," she says. "Even though there are other valid reasons for settling a trust, outside of asset and creditor protection, such as dynastic family succession planning."
This was a sentiment echoed by Sean Wong, Senior Lawyer at Dentons in Beijing, China, who said that Chinese clients are used to reserving too much power in their offshore trusts. "This is partly because Chinese clients aren't familiar with trust concepts," he said. "But this also means they don't have experience of how the structure or design of their trusts can create problems. Reserving too much power is a huge risk for Chinese clients, which can lead to sham trust or illusory trust issues."
For Nancy Chien, Partner at Bedell Cristin in Jersey, this all demonstrates how control and asset protection have to be seen as a trade-off. She explained how part of the problem is down to the evolution of trusts in recent years.
"Modern day trusts have developed in order to suit the needs of clients – in particular for clients who wish to retain control," she said. "Clients are more ambitious with what they want to achieve with their trusts. And the type of assets they want to put in have evolved significantly."
Chien also highlighted how the age of the settlors might well be a factor, pointing out how younger entrepreneurs in Asia-Pacific want the benefits of asset protection, but don't want to lose control.
"The reality, however, is that when more powers are retained by settlors, the greater opportunities there are to attack the trusts," she said. "In order to have maximum asset protection, one needs to think about what element of control one can give up. The best asset protection trust is one where the settlor has no involvement at all, and the assets are just given to the trustees. For a lot of clients that isn't palatable, and that is why there is a trade-off."
Steps to protection
Considering the potential risks posed by current global volatility and attacks on trusts, it is vital that settlors do what they can to protect their assets from the very outset. "It's critical that the trust deed is properly settled and drafted correctly, and is flexible enough to meet future events," Rumens said. "To a large extent, the strength of the trust will be determined by your advisers and the trustee. So, I always recommend getting the best that you can afford."
The choice of jurisdiction for establishing the trust can also make a difference to the level of asset protection offered, owing to the nature of the trust laws in any given country. "Under Singapore law, for instance, unless a settlor has a very clear intention to defraud a creditor, then the starting point is that the trust won't be voided if the settlor goes bankrupt," said Johnston.
Chien highlighted the importance of reviewing structures on a regular basis, because the regulatory and legal landscape changes all the time, as does the global geopolitical environment.
"Ultimately, when a trust is attacked, the best defence is going to be how it has been run by the trustees," said Rumens. "It's critical to make sure you have all the documents, such as minutes, in place, so it is clear who has been controlling the trust and what level of influence control, if any, has been held by the settlor. If everything is documented, you have a strong case to rebut any attack."
View the webinar 'How to protect wealth against volatility through offshore trusts' here.
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