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Who will guard the guards? 1

The heading above is a rough translation of lines from the Satires of Juvenal that are nearly 2000 years old but which have relevance today as would-be Russian settlors consider setting up offshore trusts to address asset protection and succession planning problems, and Russia's new CFC rules. Entrusting valuable assets to professional trustees goes against the grain of the entrepreneurial mentality. Can the trustees be trusted?

This was an important topic at a conference, held in Moscow on 18 November 2015, on the Russian CFC legislation, where Martin Palmer and Connie Clark of Jordans Trust Company (Jersey) Ltd were invited by the Russian law firm Cliff – who hosted the event – to address a Russian audience of professional intermediaries on the advantages of Jersey trusts and foundations for wealthy Russian families. This article summarises some of the key points made by Martin and Connie to encourage Russian settlors to "trust" professional trustees in Jersey. Jordans' overall message to the conference was that it is both sensible and pragmatic to do so, if Russian legal advice recommends such arrangements.

Russian CFC legislation

Russia's CFC laws will apportion profits to "controlling persons" who hold more than 25%2 of the participating interests in a non-resident entity or structure (or more than 10% where aggregate russian resident participating interests exceed 50%)2.

However, offshore discretionary trusts potentially address these participating interest conditions, as settlors and discretionary beneficiaries should have no participatory interests in the trust property.

Russian CFC laws additionally operate to apportion profits to Russian residents who exercise "control" over a non-resident entity or structure either in their own interests or in the interests of their spouse or minor children. In the case of foreign structures without legal personality like Jersey discretionary trusts – "control" is defined as the exercise or the ability to exercise decisive influence over the decisions of the trustees where these relate to the distribution of the income of the trust. Settlors of trusts will be regarded as "controlling persons" unless all of the following conditions are met:

  • The settlor must not be entitled to receive or demand income of the trust. On one view this means that whilst a settlor cannot be an interest in possession beneficiary (i.e. entitled to receive income as of right), he may be a discretionary beneficiary. However, other Russian advisors take a more conservative approach and recommend that the settlor should be excluded from benefit.
  • The settlor must not have power to direct the application of trust income (this should not be the case if the trust is discretionary).
  • The settlor must make an irrevocable contribution of the trust assets to the trustees with no reservation of rights under the trust's proper law either during the existence of the trust or on its termination. This point will require careful drafting of the trust instrument.
  • The settlor must not exercise "control" over the trustees.

In short, where a Jersey trust is fully discretionary and irrevocable with no reservation of dispositive powers under the trust to the settlor, and furthermore provided that the trustees in Jersey are exercising the exclusive effective management and control of the trust relationship – then the income and gains of the trust should not be subject to Russian CFC legislation on an arising basis in the hands of the Russian resident settlor, nor to Russian resident beneficiaries, until such income is distributed to them (when it must then be reported and taxed).

Control exercised by non-settlors

Controlling persons for Russian CFC purposes may be Russian residents other than the settlor if:

  • The person has an actual right to income from the trust or,
  • The person has dispositive powers over the trust assets or,
  • The person is entitled to receive the trusts' assets on termination of the trust.

Trust structuring issues presented at Cliff's 18 November CFC conference in Moscow, by Jordans

Why is it sensible and pragmatic to "trust Jersey trustees"?

  • The challenging regulatory environment in Jersey means that only professional trustees who are "fit and proper" to discharge the onerous fiduciary duties of professional trusteeship and who can conduct trust management and administration to the highest levels of efficiency and reliability are permitted trading licenses in Jersey.
  • The Royal Court of Jersey is an independent court and has jurisdiction over Jersey trusts. The English Privy Council stands as the final Court of Appeal, and many of the lawyers who form the judiciary in Jersey are English trained lawyers. Settlors and beneficiaries of Jersey trusts can, in the final analysis, apply to the Jersey courts to intervene in the affairs of the trust if they are dissatisfied with the trustee and communications and relationships have broken down. Needless to say this is very rare indeed.
  • Trust assets owned by the trustee are "ring-fenced" from the trustee's personal estate. So even if a professional trustee were to become insolvent, its creditors could not claim against the trust assets which form a separate fund.
  • Trustees can be removed by the settlor or a Protector or another third party nominated by the settlor. It is not thought that powers vested in a Russian resident to "hire and fire" trustees amounts to "control" of the trust relationship for CFC purposes. The Jersey courts can exercise its wide discretion to appoint or remove trustees on an application by a beneficiary, or the settlor (Article 51 Trusts (Jersey) Law 1984).
  • The duties of professional trusteeship are onerous. These duties are fiduciary. Fiduciary duties are higher duties than mere contractual obligations. The trustees' fiduciary duties are owed to the beneficiaries of the trust, who may enforce them under Jersey law in the final analysis. These duties are particularly described in Article 21 of the Trusts (Jersey) Law 1984.
  • Breach of trust committed by a professional trustee in Jersey would be disastrous for the professional trustee and could lead to the loss of the trustee's professional licence to conduct trust business. At the conference, Martin Palmer explained that a breach of trust does not require dishonest conduct, and almost always results in personal liability for the trustee 3. The trustee must then restore the trust fund from its own resources (Jersey professional trustees are subject to compulsory insurance and are required to maintain minimum solvency margins) or account for lost profits resulting from the breach of trust. On the point that dishonesty is not necessary for breach of trust – mere negligence is enough – Martin cited Midlands Bank Trustee Co. Ltd v Federated Pension Services (1995). In this case, Midland Bank Trustee Co. Ltd sued FPS for breach of trust arising from FPS negligence. At the time of this case Connie Clark was a Trust Officer of Midland Bank Trustee Co. Ltd and she was involved, on behalf of Midland Bank Trustee Co. Ltd, in the case.
  • Protectors can be appointed (on behalf of Russian settlors) whose consent is required for the exercise of certain trustee powers (e.g. to appoint trust capital to a beneficiary or to sell a trust asset). Non-Russian resident Protectors may therefore, be particularly efficient for CFC tax and reporting purposes.

Jersey Foundations

These entities were also presented to the conference, by Jordans. In form and substance, these are often said to be "incorporated trusts", but it is dangerous to treat this characterisation too literally. The Jersey foundation concept is very different from the trust, but may offer advantages, depending on the facts of a particular case:

  • Certainty. A foundation is incorporated and has legal personality. A trust is a legal relationship but it is unregistered and has no legal personality. So a foundation arguably provides more certainty of existence.
  • A foundation, being a company, owns its own assets. A trust requires the mediation of a trustee.
  • A foundation will not be "acquired". Contrast this with the large trust companies owned by private equity funds who may "change hands" every few years. Jordans, as a smaller independent trustee, offers advantages of stability in this regard. Alternatively, so-called private trust companies or PTCs offer a trust architecture that is private and not subject to acquisition. Jordans presented examples of PTCs in Jersey and the BVI to the conference.
  • The Foundation's Management Council do not owe fiduciary duties to the foundation or the beneficiaries. Their obligations are merely contractual. This is not good news for beneficiaries, but mere contractual obligation may suit some founders.
  • Foundations can prohibit beneficiaries from receiving information about a foundation (e.g. its accounts or related documents) whereas trustees have a prima facie obligation to provide beneficiaries with trust accounts and related documents 4.

Advantages of the trust over the foundation

  • For Russian settlors, the fiduciary obligation of the professional trustee to the beneficiaries is a great comfort. This puts more responsibility and accountability on the professional trustee (compared with the non-fiduciary contractual obligations of the Council of a foundation toward the foundation and the foundation's beneficiaries).
  • For UK resident Russian settlors, or Russian settlors resident in other common law countries, the taxation treatment of trusts is much more certain than of foundations.
  • Third parties may prefer dealing with trustees than with foundations, given the greater accountability of trustees.


Appropriately structured Jersey trusts and foundations offer asset protection, succession planning and CFC advantages for Russian families.

In the course of the conference, Jordans also presented material on Seychelles foundations, BVI VISTA trusts and the Private Trust Company concept in Jersey and the BVI. All these legal entities or relationships will undoubtedly have a greater role to play in Russian wealth planning in the future.

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 Martin Palmer

Martin Palmer
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The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies , nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.


1 - Sed quis cutodiet ipsos custodies: "But who will guard the guardians" (Satire 6.346-348)

2 - From 1 January 2016

3 - The exceptions to this are rare since the complainants in a breach of trust situation will be the beneficiaries. Therefore, a breach of trust would require the consent of the beneficiaries to protect a trustee from personal liability. Since the consent of all the beneficiaries would be required, this exception is rarely available to the trustee.

4 - See Article 29(d) of the Trusts (Jersey) Law 1984. Beneficiaries have rights to accounting information, but such rights become less clear-cut in litigation and discovery proceedings.


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