Balancing control with protection requires careful structuring and is the number one reason why you should establish an underlying company with your offshore trust.
By adding a company to your offshore trust structure, you can maintain a degree of control over the trust assets while also reaping the protective benefits of the trust itself. Often, the loss of control over these assets is a common concern when setting up a trust. This is because, for a standalone trust to be truly effective, the settlor must relinquish control of the assets to a trustee—several legal cases highlight the importance of this.
In Rahman v. Chase Bank (CI) Trust Co Ltd (1991), a Jersey court ruled the trust invalid because the settlor had retained excessive control over the trust assets. The settlor’s ability to distribute the trust’s assets to himself suggested that the trust was being used as a personal holding vehicle rather than functioning as a legitimate trust.
Similarly, in Mezhprom Bank v. Pugachev (2017), the High Court of England and Wales ruled that several New Zealand trusts were “illusory” and therefore invalid. The court found that despite the trusts being set up in formal terms, Pugachev retained significant control over the trust assets. This meant that, in practice, Pugachev treated the trust assets as his own, and each trust was, in fact, not a trust. The ruling emphasized that for a trust to be valid, the settlor must genuinely transfer control to the trustees. If the settlor retains de facto control over the assets, the trust can be disregarded, a concern if your primary goal is asset protection.
If protecting your assets from divorce proceedings is a priority, then Webb v. Webb (2020) highlights the need for accurate structuring as well. This appeal stems from a dispute between Mr. Webb and Mrs. Webb over the division of matrimonial property after their separation. They were married in New Zealand in 2005 and later moved to the Cook Islands. After their separation in 2016, Mrs. Webb sought matrimonial property orders in the High Court of the Cook Islands. She argued that two trusts created by Mr. Webb—the Arorangi Trust and the Webb Family Trust—were invalid and sought a division of the property under New Zealand’s Matrimonial Property Act 1976. Ultimately, the trusts were ruled invalid because Mr. Webb retained too much control over the assets, effectively allowing him to treat them as his own.
Adding a Company
In this arrangement, the trust owns an LLC or IBC, meaning that any assets held within that underlying company, such as investments or a bank account, fall under the trust’s protective umbrella and are therefore shielded from creditors or legal claims against the settlor.
While the settlor relinquishes direct ownership of the trust’s assets, they can still be appointed as the manager/director of the underlying company. This allows the settlor to manage the assets owned by the trust and potentially direct investments. This setup creates a balance between protection and control, enabling the settlor to manage the assets without technically owning them—in effect, they are managing those assets on behalf of the trustee.
The advantages of this structure are notable. Firstly, it enhances asset protection, as the trust’s assets are generally safeguarded from the settlor’s creditors. Secondly, it allows for flexibility in management; the settlor can actively participate in asset management while still enjoying the benefits of the trust. This strikes an essential balance between control and protection.
For more information on how to transfer assets to an underlying company owned by a trust, please refer to our recent article on this topic.
