Protecting Trust Assets Across Multiple Legal Systems Amidst Adverse Court Judgments Against Beneficiaries | Gibraltar

In today’s interconnected world, the protection of trust assets across multiple legal systems is crucial, especially when beneficiaries face adverse court judgments. Trusts provide a unique structure that allows individuals to separate legal ownership from beneficial ownership, thereby offering flexibility, asset protection, and privacy. However, when trust assets span multiple jurisdictions, challenges can arise to the differing legal frameworks and practices found in the common law and civil law jurisdictions.  

It is firstly critical to distinguish the legal structure of a corporate entity (eg, a limited company) versus a trust structure. With the former, whilst there is separate legal personality between directors and shareholders from the company itself, the company is able to hold assets. The key difference and characteristic of a trust is that it permits the separation of legal ownership and beneficial interest: with trusts, the trustees become the owners of the trust property (not the trust itself) and will manage the ”trust property” for the benefit of the beneficiaries. 

The strategies that could be adopted to protect trust property will depend on, among other things:

These different factors are all inter-connected with one another.

There are several types of trust but this article will focus on two: bare trusts and discretionary trusts. With bare trusts, trustees typically hold assets as “bare nominees or trustees”, meaning that, as a general rule (there are exceptions) the beneficiaries of the trust have absolute rights to the trust assets and the trustee will act in accordance with their instructions. If, for instance, beneficiaries could (and/or expect to) face potential adverse judgments and trust assets are to be protected, then creating a discretionary trust can enhance asset protection as thetrustee(s) owns the property and, consequently, beneficiaries lose ”control” over trust assets – the management and decision making powers vests exclusively on trustees. The remaining three factors outlined above are all related to one another and therefore can be considered together.

If beneficiaries could face adverse judgments affecting trust property, then, in addition to creating a discretionary trust, the location of the trustees becomes a paramount factor when protecting trust property. If the trustees are located in a jurisdiction which, for example, is not a signatory to an international convention on the recognition of judgments affecting trusts and/or has cumbersome mechanisms to recognise and enforce foreign judgments, then there is a greater prospect of protecting trust assets. In an international context, the 1985 Convention on Law Applicable to Trusts and on their Recognition (HTC 1985) recognises trusts and provides, among other things, that in recognising trusts, trustees may sue or be sued in their capacity as trustees. The signatories to the HTC 1985 include common law and civil law jurisdictions (eg, the United Kingdom and France respectively).

So, if a trustee is located in one of the signatory countries that applies the HTC 1985 and there is an adverse judgment against a beneficiary (particularly aiming at assets falling under the trust), it could pose difficulties for trustees to protect assets if the judgments derive from another country that applies the HTC 1985.

In a globalised world, trustees and beneficiaries face a conundrum over how best to protect trust assets. All matters considered, there are two paramount factors when protecting trust assets: first, the creation of a discretionary trust (as the trustees exercise exclusive control and management of trust assets and beneficiaries lose “influence” over trustees) and, secondly, the trustee’s location. The appropriate structure of a trust (including the location of trustees) will depend on the factual matrix affecting settlors/trustees/trust property against, and drawing a comparative analysis on conflict of laws focusing on recognition and enforcement of judgments; eg, whether a jurisdiction applies the HTC 1985 or can give effect to foreign judgments under common law rules.