When trusts go wrong – Introduction
A recent court case in Singapore, La Dolce Vita Fine Dining v Zhang Lan and others [2022] SGHC 278, has highlighted the importance of the effective formalities of the establishment of trusts, the appropriate management of them, and the need for proper and continued legal advice to preserve the effectiveness of structures in the face of creditor claims.
The background
The case involved the owner of two British Virgin Islands companies, Success Elegant Trading Limited (SETL), and a Cook Islands family trust, known as the Success Elegant Trust, which was established by Zhang Lan, one of China’s most successful businesswomen. The trust was established for the benefit of her son, his children, and remoter issue.
The court case centred on whether the funds held in the Bank Accounts of SETL were beneficially owned by Ms Zhang and whether receivers could be appointed over property in which she no longer had an equitable interest in but did have effective control.
The court found that Ms Zhang had transferred funds to SETL with the intention of placing those assets out of the reach of creditors while maintaining access and control over those funds.
The court also noted a number of examples of Ms Zhang’s direct interference in trust assets, despite her not being a beneficiary of the trust.
Therefore, the court found that the funds held in the Bank Accounts of SETL were beneficially owned by Ms Zhang, and that it was just and convenient given the circumstances to allow the appointment of receivers so that the judgements could be satisfied in the most cost-effective and least burdensome method.
Lessons to be learned?
The case highlights the importance of trusts’ effective formalities, the appropriate management of them, and the need for proper and continued legal advice to preserve the effectiveness of structures in the face of creditor claims.
It also demonstrates how a trust structure operated in an incorrect way might leave its assets susceptible to challenge from third-party creditors. Individuals should, therefore, be wary of having an active involvement with and the maintaining of trust property if they wish to uphold their trust’s property preservation function.
Are trusts still effective?
It is important to note that this case is distinguishable on its facts, and trusts are still an effective tool for asset protection. Maintaining control over assets and continuing to treat them for one’s benefit without the scrutiny of the trustees (or directors) may inadvertently leave those assets vulnerable to third-party creditors’ allegations of resulting or sham trusts.
Therefore, it is important to seek proper legal advice when establishing and managing trusts to ensure their effectiveness in the face of potential challenges from creditors.
Trust assets remain safe, and the case should serve as a warning to those settling assets on trust that they should maintain proper formalities and avoid any appearance of impropriety to ensure that their assets are protected.
When trusts go wrong – Conclusion
In conclusion, the case of La Dolce Vita Fine Dining v Zhang Lan and others [2022] SGHC 278 highlights the importance of proper trust establishment, management, and legal advice to ensure the effectiveness of structures in the face of creditor claims.
While trusts remain an effective tool for asset protection, individuals should be wary of any active involvement with and the maintaining of trust property if they wish to uphold their trust’s property preservation function.
If you have any queries about this article, when trusts go wrong, or any other trust or tax matter, then please get in touch.