Dear Reader,
CJEU Trust Freezing Decision: Asset Protection Depends on Giving Up Control
Asset protection trusts are often discussed as though the critical question is where the trust is established. In practice, jurisdiction is only part of the answer. Bermuda, Jersey, Guernsey, Cayman, New Zealand, Liechtenstein or any other trust jurisdiction may be relevant, but the more important question is usually whether the settlor has genuinely given up control.
That point has been illustrated again by recent judgments of the Court of Justice of the European Union on the freezing of assets held through trusts in the context of EU sanctions against Russia
(https://curia.europa.eu/site/upload/docs/application/pdf/2026-05/cp260073en.pdf , https://infocuria.curia.europa.eu/tabs/document/C/2023/C-0483-23-00000000RP-01-P-01/ARRET/321067-EN-1-html ; https://infocuria.curia.europa.eu/tabs/document/C/2023/C-0483-23-00000000RP-01-P-01/CONCL/302387-EN-1-html ; https://infocuria.curia.europa.eu/tabs/document/C/2024/C-0428-24-00000000RP-01-P-01/ARRET/321069-EN-1-html).
The cases concerned assets linked indirectly, through trust structures, to persons subject to EU restrictive measures adopted following Russia’s invasion of Ukraine. The Court was asked how Article 2 of Regulation 269/2014 applies where assets are no longer held directly by a sanctioned person, but have been placed in or held through a trust.
In the first case, C-483/23, several companies were controlled by a Bermuda company, which was itself held by a Bermuda trust. The trustee was a Swiss company. The settlor had been removed from the class of beneficiaries before being sanctioned in 2022. The Italian authorities nevertheless froze the companies and their assets, taking the view that they remained substantially attributable to the settlor.
In the second group of cases, C-428/24 and C-476/24, the Court considered the position of trust beneficiaries. One case concerned an Italian company held indirectly by a Bermuda trust. The other concerned a yacht in Italy, owned by a company controlled by a trust of which a sanctioned person was the sole beneficiary. In both cases, the trust terms apparently prohibited transfers to sanctioned persons and any form of control by them. The Italian authorities still imposed freezing measures, on the basis that the assets remained attributable in practice to the trust beneficiary.
The Court’s answer was deliberately practical. The concepts of belonging to and control in the EU asset-freezing rules are not limited to formal ownership. They can extend to de facto power over assets. The Court said that, to ensure the effectiveness of EU law, those concepts must cover all forms of power or influence exercised over the assets, even where there is no direct legal link between the assets and the sanctioned person.
That is the key point. A trust may be valid. The trustee may hold legal title. The sanctioned person may not be named as owner. He may even have been removed from the class of beneficiaries. None of that is necessarily conclusive. The question remains whether he can use, benefit from, dispose of, or influence the assets, or influence the trustee’s decisions in relation to them.
The Court also recognised that control or attribution may be inferred from the surrounding facts. Relevant indications may include the relationships between the settlor or beneficiary and other persons involved in the trust, the use of trust assets for activities intended primarily for that person, unnecessarily complex legal structures, control over the trustee, entities being created or changed shortly before sanctions, and relationships between company directors and the settlor or beneficiary.
These were sanctions cases, not tax cases and not creditor enforcement cases. The legal test is therefore specific to EU restrictive measures. But the broader lesson is familiar. Courts and authorities are increasingly prepared to look beyond formal ownership and ask who, in substance, can use, enjoy, direct or influence the assets.
The same issue arose, in a different legal context, in the English High Court decision in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch).
Mr Sergei Pugachev, the former Russian businessman and founder of Mezhprom Bank, had established a series of New Zealand discretionary trusts. The trusts held substantial assets, but Mr Pugachev was not simply a remote settlor who had transferred property and stepped away. He was a discretionary beneficiary and also held the office of protector. The protector powers were extensive. They included powers to remove trustees, veto distributions, approve amendments, and exercise significant influence over the administration of the trusts.
The High Court analysed the trust instruments in detail and concluded that, on their true construction, Mr Pugachev had not genuinely divested himself of beneficial ownership. The trusts were described as discretionary trusts, and the assets were legally held by trustees, but the retained powers meant that Mr Pugachev remained in effective control. The court therefore treated the assets as available to meet the claims of creditors. The alternative arguments, including sham and transactions defrauding creditors under section 423 of the Insolvency Act 1986, were also considered, but the central conclusion was that the trusts failed because the settlor had retained too much control.
Pugachev was not a sanctions case. It was a creditor enforcement case involving trust construction, alleged sham arrangements, and alleged transfers intended to put assets beyond the reach of creditors. The CJEU trust cases are different: they concern whether assets held through trusts can be frozen under EU sanctions law. But the practical concern is similar. In both contexts, the court looks beyond the trust label and asks whether the person said to be separated from the assets can still use, enjoy, direct or control them. The lesson for asset protection planning is clear: a trust is at its weakest where the settlor remains the practical centre of control.
This is the point I increasingly see in practice.
As a tax adviser, my first concern with trusts is usually taxation. In a UK context, that means income tax, capital gains tax, inheritance tax, settlor-interested trust rules, transfer of assets abroad, anti-avoidance provisions, reporting obligations and the taxation of distributions. In cross-border cases, it also means considering how the trust may be treated in other jurisdictions and coordinating that analysis with local advisers.
But in recent years, I have increasingly been asked about trusts as asset protection structures. That is a different question. A trust can be coherent for tax purposes but weak for asset protection. Equally, a trust may be strong from an asset protection perspective but complex or unattractive from a tax perspective. The two analyses overlap, but they are not the same.
I find it helpful to think of asset protection trusts as sitting on a spectrum.
At one end is a trust where the settlor has genuinely transferred assets to independent trustees. The settlor does not control distributions. He does not have a unilateral power to appoint or remove trustees at will. He does not have a veto over trustee decisions. He does not direct investments in practice. The trustees take advice, keep proper records and exercise their own judgment. A letter of wishes may exist, but it is treated as a letter of wishes, not as an instruction manual.
That kind of trust may still be challenged. There may be insolvency rules, fraudulent transfer rules, matrimonial claims, forced heirship issues, tax anti-avoidance rules, disclosure obligations, sanctions issues or public policy arguments. No trust is immune from attack. But the basic architecture is at least coherent. The settlor has made a real disposition of property.
At the other end is a trust where the settlor remains heavily involved. He is a beneficiary. He is protector. He can replace trustees. He can veto distributions. He can add or remove beneficiaries. He directs investments. Trustees consult him before acting. The assets remain available for his lifestyle or business interests. Everyone understands, even if the documents do not say it openly, that the trust exists to hold assets for him while keeping them away from others.
That structure may still have legal effect for some purposes. But as an asset protection structure, it is fragile. The obvious question is what the settlor has actually given up.
Most real cases fall between those two extremes. Reserved powers are not automatically fatal. A protector can have a proper role. A settlor can express wishes. A trust can be used for family governance, succession and long-term wealth planning without requiring the settlor to disappear completely from the factual picture. But the more powers and practical influence the settlor retains, the harder it becomes to argue that the trust provides real protection.
The trust deed matters, but conduct matters just as much. If trustees are independent on paper but passive in practice, the structure is weakened. If trustee minutes simply record decisions already made by the settlor or beneficiary, the structure is weakened. If trust assets are used as personal assets, the structure is weakened. If a letter of wishes is treated as binding, the structure is weakened. Asset protection depends on administration, not just drafting.
This is also why timing matters. Asset protection planning is most defensible when it is undertaken before a dispute, claim, insolvency risk, divorce, regulatory investigation or sanctions exposure has arisen. Once a person is already under pressure, a transfer into trust will attract closer scrutiny. Courts are more likely to respect long-term family succession planning than a last-minute attempt to move assets beyond reach.
Purpose matters too. A trust established for succession, family governance, long-term preservation of wealth or protection of vulnerable beneficiaries is very different from a trust established to defeat known creditors or evade restrictions. The more coherent the purpose, and the more consistently the trust is administered in line with that purpose, the stronger the structure.
The professional literature has dealt with these issues for many years. Asset Protection Trusts, 4th edition, by Milton Grundy, John Briggs and Joseph Field (https://khpplc.co.uk/product/asset-protection-trusts/), remains a valuable reference point, even though the law and enforcement environment have continued to develop. Its continuing usefulness lies in the basic message that asset protection is not magic. It requires attention to timing, solvency, creditor prejudice, governing law, enforcement risk, taxation, retained powers and the settlor’s continuing enjoyment of the assets.
For clients, the hard point is this: asset protection involves a trade-off. A settlor cannot usually keep complete control and expect complete protection. A trust that the settlor can control at will may feel more comfortable, but it will usually be less convincing when challenged. A trust that is genuinely protective usually requires independent trusteeship, real fiduciary decision-making and acceptance that the trustees may not always do what the settlor wants.
With warm regards,
Dmitry Zapol
Partner, international tax advisor, ADIT (Affiliate)
IFS Consultants, London
(www.ifsconsultants.com, dmitry@ifsconsultants.com)