The Problem with Trusts - You May Not 'Give and Retain'

The most striking advantage of using specially-designed corporations which behave as discretionary trusts, is that the client is no longer bound by the fundamental concept of trusts which forbids him to 'give and retain'.

Several trust jurisdictions have enacted special esoteric legislation which enables the settlor of a trust to maintain a significant degree of control over the assets within a trust, despite having transferred them irrevocably to the trustees. In addition, trusts with 'reserved powers' are increasingly appearing as a means to give the settlor a greater degree of 'control' after such an irrevocable transfer, despite the trustees holding legal title to the trust assets and being subject to the terms of the trust deed.

There is always the danger in such arrangements that the so-called 'trust' might slip over the razor's edge so that it no longer can be described as a 'trust' and the arrangement is one of 'sham'. Alternatively, there was never a properly-constituted trust, and the assets remain the property of the settlor from the date of purported transfer, with catastrophic tax consequences. Tax jurisdictions, trustees in bankruptcy, and creditors are increasingly using the doctrine of 'sham' to attack the assets of a 'settlor', and in notable cases have succeeded, and it must never be forgotten that the jurisdiction from which a creditor bases his claim may not always recognise a trust under the law of the debtor.

With a specially-arranged and constructed corporate vehicle, there is a far greater ability for a client to 'give and retain' as the relationship between the client and the company directors are subject to company law and contract law. Whilst there exist equitable and fiduciary obligations on the part of the directors, a special purpose company can displace the law of equity which generally governs trusts.

To conclude, with a specially-arranged corporation in which Chancery Partners specialise, a client can 'give away' his assets yet still retain significant influence over them which does not qualify as legal 'control'. He can legally and legitimately state that he is no longer the beneficial owner of the assets, yet may continue to have influence over them. This, of course, is particularly attractive to clients who live in civil code jurisdictions, where trusts and civil code systems frequently clash, to the extent that in some jurisdictions, trusts are simply not recognised. Corporations, no matter how they are organised and arranged (legally), are always recognised and respected in civil code countries.