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“It is only when the tide goes out that you learn who has
been swimming naked”. This quote – usually attributed
to Warren Buffett – resurfaces when economic conditions
worsen, but what does it mean? In the context of the financial
system, it means that a recession can leave a struggling business
exposed and with nowhere to hide. Litigation, being largely
counter-cyclical, usually increases. Defendants include businesses
(those that fail as a result of the tougher economic conditions and
those that default on contractual and other obligations) and also
the people running and owning those businesses.
Counter-intuitively, divorce rates in many jurisdictions dipped
slightly during the so-called Great Recession, but then increased
as the global economy started to improve.
Many current economic forecasts make for grim reading: “A
recession in America by 2024 looks likely” (the Economist, 2
June 2022); “Bank of England warns the UK will fall into
recession this year” (BBC News, 5 August 2022);
“Goldman Sees Euro-Area Recession in Second Half of This
Year” (Bloomberg, 27 July 2022); “IMF slashes global
growth forecast and raises inflation projections” (Financial
Times, 26 July 2022).
So, as financial conditions deteriorate and inflation rises,
what should trustees be doing with their structures? In this
Article we list six things that trustees should consider to make
sure their structures are “recession ready”.
This is by no means a comprehensive list of the things that
trustees need to consider but trustees who work through this list
may find that some of their trusts need attention.
Checking that investment direction mechanisms have been
We are regularly asked to advise trustees on their liability
where trust assets – usually a family business – are
retained in a trust over many years whilst falling in value. The
trustees have retained the assets, which often make up all or most
of the value of the trust, in the mistaken belief that they were
required to do so. However, upon closer analysis (which usually
takes place after the fall in value, not before!), it emerges that
whilst the trust includes an “investment direction”
mechanism, that mechanism has not been triggered and no direction
has been received.
It is a worthwhile pre-recession planning exercise for trustees
of trusts containing investment direction mechanisms to ensure that
they have in place valid and appropriate investment directions
which cover all relevant assets. It is especially valuable to
perform this check before the assets in question fall in value.
Make Trusts irrevocable
Many settlors establish revocable trusts. This allows them to
get back the trust assets at any time and provides the comfort of
knowing that they are always – ultimately – in control.
However, revocable trusts offer little or no asset protection to
the settlor, and for good reason. If a settlor can take back the
assets of the trust at the push of a button, or the stroke of a
pen, why should those assets be protected from the settlor’s
the mechanism for allowing creditors of the settlor to gain access
to the assets of a revocable trust differ between jurisdictions,
the end result is usually the same and those creditors will be able
to use trust assets to meet claims brought against the settlor.
In many cases, trusts start their lives as revocable whilst the
settlor gets used to the concept of a trust and builds a
relationship with the trustee. The intention is that the
settlor will later release the power of revocation and the trust
will become irrevocable. The planned release often does not
With the threat of recession looming, now is a good time to have
the conversation with settlors. Releasing powers of revocation
before there are creditors with claims against the settlor
typically provides much greater protection to trust assets than
releasing those powers after such claims have arisen, or look
likely to arise.
Release other powers
It is not only powers of revocation that should be reviewed and
possibly released as part of pre-recession planning. Case law from
multiple jurisdictions over the last 10 years or more makes it
clear that the holding of certain combinations of other powers can
also leave trusts vulnerable to attack by creditors of the settlor.
For example, a settlor with a power to remove and replace a trustee
and a power to add and remove beneficiaries, might be treated as
retaining the ownership of the underlying trust assets.
Whilst the case law on these points is far from settled, an
early release of potentially problematic powers – where they
are no longer considered essential by the settlor – can avoid
the need for long and complicated legal arguments later.
Helping settlors to retain the right level of control
Not all settlors will respond well to a discussion about
removing their control by releasing their retained powers over a
trust. In many cases, a wider discussion about the appropriate
level of, and mechanism for, retained control might be more
appropriate. This might include discussions around moving some
settlor reserved powers into the hands of a third party protector,
or discussions around whether the settlor would benefit from using
a Private Trust Company (PTC) as a trustee so that he/she could be
on the board of that PTC, along with a professional co-directors.
PTC structures can be an effective mechanism for allowing settlors
to remain involved in decision making whilst protecting trusts from
attack by creditors of the settlor.
Dividing Structures to separate out business and non-business
It is not uncommon for settlors to establish a trust and, as the
years pass, for the trust to become the owner of both business and
Often there are asset protection benefits arising from a
separation of the business assets and the personal assets. By
holding these classes of asset in separate structures or, at least,
separate companies within the same structure, the risk of the
personal assets being used to meet liabilities of a failed or
failing business is further reduced.
In-laws as Beneficiaries
Whilst divorces seem to dip during recessions, that is countered
by a spike as recessions end. The biggest threat to many trusts
comes when a beneficiary is going through a divorce. This problem
can be magnified where the in-laws are themselves members of the
class of beneficiaries of a trust as they will have – in most
cases – rights to information about a trust and its
When divorce proceedings are issued, trustees have to be careful
in their response and simply removing the divorcing “in
law”, as an automatic response, can lead to claims that the
trustee acted inappropriately. Reviewing the beneficial class of
trusts, before recessions begin and before divorce proceedings are
issued, can allow appropriate changes to be made at a time when
those decisions will be less contentious.
Recessions are an inevitable part of the economic cycle and
trustees need to be alive to the risks that they bring to
structures. By spending a few hours reviewing structures in advance
of a recession, trustees can reduce the risk that the next time the
tide goes out, they are the ones who are found to be swimming
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.