An asset protection trust is built to work while the settlor is alive and facing risk. Rather less attention usually goes into what happens when they are not – and since these structures are designed to run for decades, that is the part most likely to be tested.
This article covers what changes on death, what changes on incapacity, and the specific gaps that show up when a family has to deal with a structure somebody else set up.
Death: the structure keeps going
The central point is one that follows from how a trust works at all. The trustee owns the trust assets. The settlor does not. So the settlor’s death does not transfer anything, there is nothing in their personal estate to administer, and no grant of probate is needed to deal with trust property.
That is a practical advantage people tend to discover only at the point of need: while an estate in several countries works through several court processes, the trust assets are unaffected and the trustee can continue to act. Our pros and cons page sets out where that continuity is an advantage and where it is a constraint.
What governs the structure from that point is the trust deed. Depending on how it was drafted, the trust may continue for the benefit of the surviving beneficiary class, divide into separate sub-trusts for named beneficiaries, distribute outright on specified events, or simply carry on as before with the settlor removed from the picture.
The letter of wishes becomes the main guide
Where the trustee holds discretion, the letter of wishes is what tells them how to exercise it once the settlor is no longer available to ask. It is not binding, but a well-written one is the difference between a trustee who can act with confidence and one who has to work out the settlor’s intentions from inference.
The letters that work set out reasoning, not just outcomes: why beneficiaries are treated differently, what the settlor would want done if circumstances changed, how education, business interests and spouses should be approached. The letters that fail are a page long, ten years old, and silent on the children born since.
Incapacity: the part deeds often miss
Death is a clean event with a certificate. Incapacity is gradual, contested and much harder to draft around – which is why many deeds address the first carefully and the second barely at all.
The questions that need answers:
- What happens to reserved powers? If the settlor retained a power to direct investments, to add or remove beneficiaries, or to replace the protector, does that power lapse on incapacity, pass to someone else, or sit unexercisable?
- Who determines incapacity, and how? A deed that is triggered by incapacity needs a mechanism – typically medical certification by a stated number of practitioners – or the trustee is left adjudicating a family dispute.
- Does the trustee’s discretion change? A settlor who was previously consulted informally can no longer be, and the trustee needs to know whether to consult someone else instead.
Note the tension here. Reserved powers that are too broad undermine the asset protection position while the settlor is alive and well, because retained control is exactly what a creditor argues about. Powers that are too narrow leave the structure rigid. A deed has to balance the two, and the balance point is a drafting question for the settlor’s own counsel. Our how it works page covers the control question in more detail.
Protector succession
Where a protector has been appointed, they typically hold the power to remove and replace the trustee – the most consequential power in the structure. A protector who dies, resigns or becomes incapable with no named successor and no appointment mechanism leaves that power stranded.
A deed should name successor protectors, or state who may appoint one, or both. Where a professional protector or a protector committee is used, the succession question is handled by the firm rather than by the deed, which is one reason families with long horizons often prefer it. Our trust protectors page covers the role and its limits.
The trustee does not die
One structural advantage worth noting. A licensed trust company is a corporate entity with regulatory continuity obligations – it does not die, retire or lose capacity, and if it is acquired or ceases business its regulator requires an orderly transfer of client affairs.
That is a meaningful difference from an individual trustee, and part of why these structures use licensed companies. Our trust companies page covers the firms involved and how they are supervised.
The LLC manager gap
This is the single most common practical failure, and it has nothing to do with the trust deed.
Many structures put a limited liability company beneath the trust: the trust owns the LLC, and the LLC holds the investment accounts and other assets. The settlor is frequently appointed manager of that LLC, so that they can continue to direct investments day to day without the trustee being involved in every decision.
Then the settlor dies, and nobody is the manager. The bank will not accept instructions. The trustee owns the membership interest but has not been appointed to manage. The operating agreement is silent, or names a successor who is also deceased, or requires a member resolution that nobody has prepared. The assets are safe but frozen, sometimes for months, at exactly the point the family needs access.
The fix is unglamorous: an operating agreement that names a successor manager and a fallback, a mechanism for the member to appoint one, and a current signature card. It should be reviewed at the same time as the trust deed. Our pages on the trust with a Nevis LLC and on holding LLC interests cover how the two layers fit together.
Reporting continues
A death does not suspend reporting obligations; it reassigns them, and the first year afterwards is when they are missed.
For US-connected structures, the grantor trust reporting that applied to the settlor generally ends with them, but obligations arise for the estate and for beneficiaries – reporting of distributions received, and the trust’s own annual return with a statement to US beneficiaries. FBAR obligations attach to anyone with signature authority or a reportable financial interest, which can include a beneficiary or an executor who did not previously file. Penalties for late filing in this area are severe and are assessed per form per year.
The trustee also continues to report under the Common Reporting Standard, and a change in beneficiaries or in their tax residence is a change the trustee has to capture. Our compliance page covers the ongoing position.
The practical implication is that the executor and the beneficiaries need to be told, early, which filings they are now responsible for. Expecting them to work it out is how a penalty happens.
What a family actually needs to know
Independently of the drafting, a structure needs to be findable. A surprising number are not.
- Who the trustee is, and how to contact them.
- Who the protector is, and who succeeds them.
- Where the executed deed, letter of wishes and LLC operating agreement are held.
- Which accounts sit beneath the structure, and at which institutions.
- Which adviser coordinated it, and who the current contact is.
A single page covering those points, kept with the will and refreshed when anything changes, saves a family months. It contains nothing confidential that the trustee does not already hold.
When to review
A death, a birth, a marriage or divorce in the beneficiary class, a beneficiary changing country of residence, a protector resigning, a change of trustee, a substantial contribution, or a significant change in the settlor’s health. Any of those is a reason to read the deed again rather than assume it still fits. Our article on trust due diligence covers the updates the trustee will want at the same time.
Where to go next
Get in touch to review an existing structure’s succession provisions, or read how a Cook Islands trust is put together.
