Concept
Behind the word "trust" sits a whole family of structures with a common skeleton: the settlor transfers the assets, the trustee manages them, the beneficiary takes the benefit — how the mechanism itself works is covered separately. The type of trust decides who really controls the assets, how well they are shielded from creditors and heirs, and how they are taxed. The wrong choice of type turns into weak protection and an unexpected tax bill.
The idea grew out of English equity. Leaving on crusade, a knight would convey his land to a trusted person to the use of the family; the common law flatly refused to recognise such an arrangement, and the Lord Chancellor came to the rescue through the Court of Chancery. From the medieval use were born the modern trust and the split of ownership — legal in the trustee, beneficial in the beneficiary. Civil law knew no such split, which is why the types of trust still live primarily in common law jurisdictions, while on the civil-law continent analogues are sought for them.
Discretionary and Fixed
In a discretionary trust the trustee itself decides which members of the beneficiary class receive a distribution, and how much; no one holds a guaranteed share. The settlor leaves a non-binding letter of wishes, but the discretion formally belongs to the trustee — hence the maximum of flexibility and protection: what a beneficiary does not own as a right is hard to take away through his creditor or a former spouse. In a fixed trust the shares are set in advance and predictable; that rigidity is more transparent to the tax authority but protects worse and does not adapt to a family's changing life. Estate planning is therefore dominated by the discretionary form.
Revocable and Irrevocable
A revocable trust can be amended or wound up by the settlor at any time. That is convenient for managing property during life, but it usually gives no protection from creditors and no tax advantage: for both a court and the tax authority the assets are still treated as his. An irrevocable trust is a genuine transfer with no "undo" button; it is the one that shields assets and works in estate planning. Parting with control entirely is not required for this: reserved powers regimes let the settlor keep the right to approve investments and distributions without destroying irrevocability — more on this below.
Special Types
Life Interest Trust
One beneficiary — most often the surviving spouse — receives for life the income or the right to use the property, and on their death the capital passes to the next in line, usually children from an earlier marriage. This is the classic answer to a second marriage and to a phased transfer across generations. In England such structures are tightly tied to inheritance tax, whose regime changed noticeably after the 2025 reform.
Purpose Trust
Here the trust has no human beneficiaries: it is held for a stated purpose, and a special figure — the enforcer — polices its execution. Such trusts are convenient as the "holder" of the shares of a PTC or a family holding company, in charity and in the orphan structures used in transactions. Separate statutory regimes are written for them: the Cayman STAR (Special Trusts (Alternative Regime) Law 1997) allows a trust for persons, purposes, or both at once, while the British Virgin Islands VISTA (2003) is tailored to holding the shares of an operating company. A detailed treatment is in the material on the purpose trust.
Bare Trust
In a bare trust (also called a simple trust) the trustee remains a pure holder of title, and the beneficiary may demand the assets for himself at any time. For tax the structure is transparent: income and gains are treated as the beneficiary's income directly. It is used to hold assets in the name of minors, as a nominee holding, and as a technical link inside a more complex structure.
Spendthrift and Protective Trusts
When capital must be walled off from the beneficiary himself or his creditors, protective forms are used. The American spendthrift trust bars the beneficiary from pledging or selling future distributions, and creditors from reaching them before distribution. The offshore asset protection trust (Cook Islands, Nevis) rests on short limitation periods and firewall provisions that cut off foreign judgments. The strength of any of these forms rests on timing: the trust must be established long before a specific creditor or claim appears.
Reserved Powers, STAR and VISTA
The old doctrine required the settlor to let go of control entirely. Offshore laws softened this: reserved powers regimes (the first was the Cayman Trusts (Immediate Effect and Reserved Powers) Law 1987) let the settlor keep investment decisions, the approval of distributions, and the appointment and removal of the trustee — and the trust nevertheless remains valid. Jersey and Guernsey add firewall protection to this. VISTA goes further still and lifts from the trustee the "anti-Bartlett" duty to intervene in the affairs of the company whose shares lie in the trust: the family business continues to be run as before. The price of excessive control is the risk of a sham, discussed below.
Foundation as a Related Form
The continent, which knew no trust, answered with the foundation. A foundation (Stiftung) is a standalone legal entity without members, governed by a council under the founder's charter; in effect it is close to an irrevocable discretionary trust while being more comprehensible to civil law and to registers. The family foundation of Liechtenstein and the Panama private interest foundation are typical examples; paired with a PTC, the foundation often holds the trust company itself.
Recognition and Regulation
The main weakness of a trust outside the common law is that there it may simply not be recognised. The Hague Convention on the Law Applicable to Trusts and on their Recognition (1985, in force since 1992) was conceived as the solution, but only about a dozen and a half states ratified it — mainly common law plus a few civil-law ones: Switzerland, Italy, the Netherlands, Luxembourg, Liechtenstein, Monaco. France, Germany and Russia stayed aside, so the effect of a trust in those countries is not guaranteed. The second front is forced heirship: the compulsory share of heirs in many jurisdictions collides with the firewall provisions of offshore centres, and the outcome of the dispute is decided by whose court hears it.
A court may declare a trust a sham if, behind the façade, the settlor never actually parted with control and the trustee merely carries out his instructions. The use of statutory reserved powers does not by itself create a sham — unlimited actual control does. That is why the line between retained influence and a sham transfer is fixed on paper; oral arrangements with the trustee only do harm here.
In terms of tax transparency the trust long ago ceased to be a shelter. Under the CRS standard the settlor, trustee, protector and beneficiaries are treated as Controlling Persons (in essence — beneficial owners) and fall into the automatic exchange regardless of whether any of them actually disposes of the assets. For settlors and beneficiaries from Russia the CFC logic is layered on top: control over a foreign structure without forming a legal entity gives rise to notification and tax obligations — the detail is in the analysis of trusts and CFC.
How to Choose
A quick navigation by objective: for asset protection and transfer to heirs, an irrevocable discretionary trust fits; for a surviving spouse — a life interest; for holding the shares of a holding company or a PTC — a purpose trust or VISTA; for a hard defence against creditors — an offshore asset protection trust. Every choice is then checked against the compulsory share of heirs, the CRS regime, and the tax residence of the beneficiaries.
This material is for informational purposes only and does not constitute individual legal advice.