With the furore over the release of the Paradise Papers highlighting the widespread use of aggressive tax avoidance, Susan Rosser, partner and Gemma Rochelle, senior associate, litigation dispute resolution at Mayer Brown International LLP examine the risks of discretionary trusts in light of the long-running Pugachev litigation
Beneficiaries of a discretionary trust do not have ownership rights over the trust's assets; whether they ever receive a distribution from the trust assets, when and in what value is in the discretion of the trustees.
Discretionary trusts can therefore be an effective way for the settlor to protect assets which he intends to be enjoyed by the beneficiaries from being lost to third parties, including creditors.
But what happens where a creditor believes that the ‘trust’ is just a smokescreen designed to hide assets?
Traditionally, the creditor would need to prove that the trust documentation was a sham on the basis that the settlor and trustees intended subjectively to create different rights and obligations from those appearing in the trust document and to give a false impression of those rights and obligations to third parties.
