BY VIBHA VALLABH
There is often the misconception that the purpose of an offshore trust is for tax evasion. In fact, when the Panama Papers story broke, I often found myself explaining to people outside the industry that there are many reasons why a person may want an offshore trust. It may be because they are subject to forced heirship laws in their home country; protection of privacy; risk of kidnapping; extortion and ransom; lack of rule of law; lack of political instability; litigation risk; secret second family or protection of female family members living in a patriarchal society.
Whatever the motivation, to quote Charles Darwin, “it’s not the strongest that survive, it’s the ones adaptable to change”. An offshore trust is simply another vehicle of assurance for asset protection and wealth planning diversification which everyone has the freedom to do but which takes a person with great foresight to choose.
So a client has the foresight to organise the establishment of an offshore trust, however it’s one thing to build the ship but quite another to make it sea worthy to survive a storm. Giving up control of one’s assets to a trustee is not easy for some and in some cases a client may insist on having onshore officers such as co-trustee, managing trustee or protector carry out one of these roles themselves, or if they have no formal role may direct the trustee’s every move, all of which make for a leaky boat.
In the case of the settlor directing the trustee’s every move, there is numerous case law to show that a court will likely declare that the trust is illusionary or a sham and therefore the assets are the personal property of the settlor as opposed to being protected by the trustee of the trust, leaving the doors wide open for any litigant to gain access to those assets.
An onshore co-trustee, managing trustee or protector provides the opportunity for the onshore court to direct them to take adverse action against the trust to the exclusion of the offshore trustee, failure to do so could hold them in contempt of court.
This is especially true if the onshore parties live in countries that are highly litigious or have no respect for the rule of law. Despite the trustee and the governing law of the trust being offshore, a good litigator in that country will find a way to attack the trust through a back door via the onshore parties.
An onshore co-trustee and managing trustee is an easy target but not so obvious is a protector, this will depend on the type of power that has been allocated to them. A protector may be allocated structural, positive, or negative veto powers. The obvious route to attack will be where the protector has positive powers directing the trustee to take some action such as distributions to beneficiaries, additions or removal of beneficiaries of the trust, and investment decisions or structural powers that allows the protector to remove and appoint the trustee or move the situs of the trust.
Ideally in order for the trust to withstand any storm, all of the trust assets should be held offshore; the settlor and beneficiaries should not be directing the trustee what to do, nor should they be given any formal powers within the trust deed; and the co-trustee, managing trustee or protector if appointed should be resident and domiciled outside of the home country of the settlor and beneficiaries.
If a co-trustee, managing trustee or protector is appointed they should not hold any significant assets in the home country of the settlor and beneficiaries or if a corporate entity, should have no subsidiary or branch onshore. The protector should only be given limited negative veto powers and if granted structural powers, restrictions be imposed so that any appointment of trustee, governing law or successor protector must remain offshore.
Regardless of events that may affect the settlor or beneficiaries the trust should be able to continue without any interference from outside influences no matter how big the storm, if done properly the trust should be able to ride any waves which will ensure that the assets held in the trust are well protected, fulfilling it’s intended purpose.