MYKOLAS ROMERIS UNIVERSITY

LAW FACULTY
INSTITUTE OF PRIVATE LAW

EVALDAS CERKESAS

TRUSTS AND FOUNDATIONS AS THE ASSET PROTECTION

AND
TAX MITIGATION VEHICLES

Master Thesis
1.2 Definition and Structure of Trusts

In this subsection of Master Thesis will be presented an academic as well as a trust

definition established in the statutes of Guernsey, Panama, and Cyprus.
Despite as many definitions of trust as there are authors on the subject, however, the
growing consensus shows up on the essential features of trust. Therefore, it is possible to
distinguish such features under each of a trust concept:
(1) the assets constitute a separate fund and are not a part of the trustee's own estate;
(2) title to the trust assets stands in the name of the trustee or in the name of another
person on behalf of the trustee;
(3) the trustee has the power and the duty, in respect of which he is accountable, to
manage, employ or dispose of the assets in accordance with the terms of trust and the special
duties imposed upon him by the law. The reservation by the settlor of certain rights and powers,
and the fact that the trustee may himself have rights as a beneficiary are not necessarily
inconsistent with the existence of a trust.
The simplest form of trust definition is as follow - a trust is a right of property held by
one person (a trustee) for the benefit of another person (a beneficiary) that legal experts
sometimes refer to by the Latin name of cestui que use. A trust arises when an establisher (a
settlor) transfers the assets to a trustee in order to manage them for the benefit of the
beneficiaries.1
Some authors formulate such a trust definition: “The essence of trust is the imposition
of an equitable obligation on a person who is the legal owner of property (a trustee) which
requires that person to act in good conscience when dealing with that property in favour of any
person (the beneficiary) who has a beneficial interest recognised by equity in the property. A
trustee is said to hold the property on trust for the beneficiary”.2
According Art. 1 of the Trusts Law of Guernsey3 (hereafter – TLG) a trust exists if
person (a trustee) holds or has vested in him, or is deemed to hold or have vested in him,
property which does not form or which has ceased to form part of his own estate –for the benefit
of another person (a beneficiary), whether or not yet ascertained or in existence, and/or for any
purpose, other than a purpose for the benefit only of the trustee.

1
Stone, Harlan F. "The Nature of the Rights of the "Cestui Que Trust"" Columbia Law Review 17.6 (1917) p. 467
2
G. Thomas, A. Hudson “The Law of Trusts”, Oxford University Press; 2 edition (2010) p. 67
3
The Trusts (Guernsey) Law, 2007, adopted by the Order in Council No. III of 2008
 The Trust Law of Panama4 (hereafter – TLP) Art. 1 establishes the definition of trust as
follow: “a trust is a legal act by virtue of which a person called a settlor transfers title to real or
personal property to a person called a trustee or a fiduciary for its administration or disposal in
favour of a beneficiary, who may also be a settlor.
Under the International Trusts Law of Cyprus5 (hereafter - ITL) Art. 2(c) "international
trust" means a trust in respect of which: the settlor, being either a natural or legal person, is not
a resident of the Republic during the calendar year immediately preceding the creation of the
trust. At least one of the trustees for the time being is a resident in the Republic during the
whole duration of the trust and no beneficiary, whether a natural or legal person, other than a
charitable institution is a resident of the Republic during the calendar year immediately
preceding the year in which the trust was created.
A trust definition established in the Draft Common Frame of Reference6 is a follow: “a
trust as a legal relationship in which a trustee is obliged to administer or dispose of one or more
assets (the trust fund) in accordance with the terms governing the relationship (trust terms) to
benefit a beneficiary or to advance the public benefit purposes.
Taking into account above, also it’s necessary to define the private foreign trust
expression in this Master Thesis. Although, it has no settled definition in the private
international law, however, the typical private foreign trust references to PT that has a legal
connection with two or more countries, included the property in two or more countries and
these countries have the different legal systems.7 In addition, the private foreign trust is defined
as PT that is governed by the foreign law as well as established of the non-resident settlor. In
addition, it is common to the foreign trust to have a non-resident beneficiary. In this Master
Thesis, a private foreign trust is going to be analysed. However, making this Master Thesis
easily readable and understandable, PT definition is going to be used the most often.
Before starting to analyse PTs in particular jurisdictions it is worth to mention that
typically, four main components of PT could be distinguished. (Graphic 1 below). These four
components are common in all jurisdictions that have PT concept in their legal systems.

4
The Trust Law of Panama No. 1 of 1984. (Unofficial translation from Spanish to English)
5
The International Trust Law of Cyprus 1992
6
Draft Common Frame of Reference, Art. X. – 1:20
7
J. Glasson “The Phenomenon of the International Trust”, Jordan Publishing Limited (2002), p. 1-2
 Settlor Protector

Contribution of assets Consent required

+ letter of wishes for some actions
Trust
(trustee)
Distribution

Beneficiaries

(Graphic 1.)

We will look what differences exist in Guernsey, Panama and Cyprus legislation,
establishing definitions of PT parties and from what kind of assets PT could be formed.
Starting from a settlor, afterward we will go over to a trustee and a beneficiary respectively
and finally, this subsection will be finished by the peculiarities of protector and trust fund in
above-mentioned jurisdictions.

Settlor
Under the general rule once the trust is created a settlor will have divested himself of
legal ownership of the trust assets. Also, the settlor may be a beneficiary and in certain
circumstances, he may act as a co-trustee. A settlor retains a degree of control over the trust by
reserving of certain powers to himself (or a third person), such as the power to approve the
distributions, to appoint and remove the trustees and to revoke a trust. In addition, it is essential
to the validity of a trust that settlor may not actually dispossess himself of the trust assets and
would not become the sole trustee and beneficiary.
 Worth to mention that settlor should hold absolute title in the property that supposed to
be settle on trust. If settlor does not hold the absolute title in the property rights, it is impossible
to create the valid trust.8
Under TLG Art. 80 settlor means a person who directly or indirectly provides trust
property or makes a testamentary disposition on trust or to a trust.
According to TLP Art. 2 the settlor definition is very laconic and tells that the settlor is
the natural or juridical person who sets up the trust.
Whereas, the settlor definition in Cyprus is established in ITL Art. 2, it says that settlor
means a legal or natural person who provides trust property or makes a testamentary disposition
under the terms of trust or in a trust.

Trustee
A legal title to the trust assets is vested to a trustee under the obligations imposed by a
trust deed. He is responsible for the administration of trust and must act with due diligence, as
would a prudent person, to the best of its ability and skill and must observe the utmost good
faith. A trustee must exercise its powers solely for the benefit of the beneficiaries. The trust
assets constitute a separate fund and do not form the part of the trustee’s own estate. In addition,
a trustee has a fiduciary duty towards a settlor while at the same time, he is accountable towards
the class of beneficiaries.
TLG Art. 1 establishes the trustee definition as follow: “a trust exists if a trustee hold
or has vested in him, or is deemed to hold or have vested in him, property which does not form
or which has ceased to form part of his own estate” <…>. Under the mentioned article a trustee
holds or vests in him assets: (a) for the benefit of beneficiary, whether or not yet ascertained or
in existence, and/or (b) for any purpose, other than a purpose for the benefit only of the trustee.
Whereas Cyprus was the colony of United Kingdom its legal system was strongly
influenced by later. According to Art. 2 of ITL, firstly, a trustee means a legal or natural person
who holds or has had trust property transferred to him. Secondly, a trustee is deemed to hold
or have had trust property transferred to him, or is expected to have trust property delivered or
transferred to him. Thirdly, all assets to be held by him: (a) for the benefit of a beneficiary

8
A. Hudson “Equity & Trusts”, Routledge, (2001) p. 33
irrespective of whether the trustee is also the beneficiary of the trust; and/or (b) for any purpose,
which is not for the exclusive benefit of the trustee.
Under Art. 2 of TLP trustee is the natural or juridical person to whom the property is
transferred in order that the settlor’s will to be carried out.
A trustee is possessed of both powers and obligations. By the word ‘powers’ is meant
the range of abilities and capacities set out in the terms of the trust. For instance, to hold the
trust fund, to invest the trust fund in specified investments, to exercise its discretion between
certain classes of beneficiaries and so forth.9 By the word ‘obligations’ is meant the duties
contained in the terms of the trust which the trustee is compelled to carry out. For instance, the
duty to get in and preserve the trust property, to keep the accounts, not to profit from a
trusteeship, etc.

Beneficiary
The Guernsey legislator10 established that beneficiaries are the persons entitled to
benefit from the assets held on trust or in whose favour a power to distribute trust property may
be exercised.
The beneficiary definition under the Panamanian regulation is established in Art. 1 of
TLP. According to the mentioned article a beneficiary is the natural or juridical person in whose
favour a trust is established.
Whereas in Cyprus this definition established as fallow: “a beneficiary means a legal
or natural person, including persons not yet born at the time of the creation of the trust, or a
person who is part of a class of people entitled to a right or interest in property which is subject
to the trust”.11
Also, a settlor preserves a right for himself to be one of the beneficiaries. Nevertheless,
in order for a trust to be valid, there must generally be sufficient certainty as to the identity of
beneficiaries. An express power for the addition of further persons to the class of beneficiaries,
however, may be included in the trust instrument. The beneficiaries may enjoy the equal or

9
C. Thomas “Maintaining and restoring public trust in government agencies and their employees”
Administration and Society, 30(2), (1998) p. 166-193
10
Art. 80 of TLG
11
Art. 2 of ITL
unequal benefits, as a trust instrument prescribes or, in the case of a discretionary trust as a
trustee may determine. 12 It is also possible to include in a trust instrument the power to exclude
the beneficiaries from the future benefit.
The most important distinction is between the vested rights and rights that remain
contingent on some eventuality provided under the terms of trust. For instance, under the mere
power of appointment, a beneficiary have no vested rights in any property until a trustee
exercises his power of appointment in favour of that.13 A power of appointment does not give
a beneficiary any right in the money: all that the beneficiary has is an unenforceable hope that
the holder of the power will choose to benefit him.

Property of trust
The property that forms a trust fund may be of any type of movable or immovable
property. Further assets may be added at any time after the settlement of the initial assets.
Indeed, a common arrangement is to establish a trust with a nominal initial amount and
subsequently to add more assets. Therefore, fixed amount of asset should not be specified in
the main trust deed. Forward the specific provisions regarding the trust assets in Guernsey,
Panama, and Cyprus will be presented.
Under Art. 7 of TLG any property may be held on trust and trustee may accept property
to be held on trust from any person.
Under Art. 2 of TLP, a trust may be constituted with the assets of any form or nature,
present or future. The assets may be added to a trust by a settlor or by a third party, after the
creation of trust, subject to the acceptance of trustee.
The ITL formulates such provisions regarding the trust assets: “disposition - means any
disposition or number of dispositions carried out in any manner and includes any transaction,
gift, grant or transfer of property of any nature”, 14 in other words that mean that settlor could
transfer to the fund of trust the property of any nature without any restrictions.

Protector
It is not essential for the validity of trust that there may be any protector. However, in

12
There is almost an universal agreement that trust should be the irrevocable discretionary trust. As the object of
a discretionary trust, a beneficiary has no vested or quantifiable interest in the trust property and therefore his
interest can not be attached by a judgment creditor or a trustee-in-bankruptcy
13
UK House of Lords case Re Brook’s ST [1939] 1 Ch 993
14
Art. 2 or ITL
order to counterbalance the wide discretionary and fiduciary powers conferred on a trustee it is
considerable useful for a settlor to appoint a trustful person or a professional advisor, or even
himself, to act as a protector of trust. In such cases, the consent of protector will generally be
required before the trustee may exercise certain strategic powers under the trust instrument. On
the protector’s death, incapacity or resignation, his powers could be passed on to another
person.
Looking to the particular legal norms in the jurisdictions analysed on this Master
Thesis, which describe the protector definition, the legislator of Guernsey does not define a
description of protector. However, Art. 15 of TLG constitutes that trust is not invalid by the
reservation or grant by a settlor (whether to himself or to any other person) of <…> the powers
or interests. In other words, the powers or interests could be granted to any trust party including
a protector.
No specific provisions exist in TLP regarding the protectors, as in the case of TLG.
Nevertheless, Art. 9 of TLP specifies that trust settlement may include any clauses, which a
settlor and trustee may wish to include, provided that they are not contrary to the morality, law
or the public order. Therefore, a protector is admissible, with or without remunerated the
administrative and/or fiduciary functions.15
Under ITL16 a protector is a person other than a trustee to whom the powers of any
nature are conferred by the trust instrument, including the power to advise a trustee. The
advising could cover the directions how to exercise the trustee’s powers. In addition, a protector
could veto the trustee decisions, or to appoint and remove a trustee.
In the next subsection, the author of this Master Thesis will reveal international PT
recognition under the multinational Convention that enables the countries signatories to
recognize the trust structure without having it in their legal system.

15
R. Owens, “Panama”, Trusts & Trustees, Vol. 3, No. 8 (2007), p. 488
16
Supra note 27