The temptation for settlors of trusts and founders of foundations to retain powers over their arrangement needs to be resisted or, at least, examined with care. With foundations, retained powers are legitimate in principle but care is, nevertheless, needed to decide exactly what power has been retained. With trusts, a settlor is less likely to be able to retain powers without falling foul of the basic rule of trusts that the settlor transfers the legal estate to trustees and then drops out of the affair except for perhaps what might be embodied in a Letter of Wishes which is less mandatory than retaining a power. Some jurisdictions have defined what powers may be retained, such as the Cayman Islands, but this is only to clarify that the retention of the powers so specified do not prejudice the validity of the trust; in other words, by retaining those powers, the arrangement is not a sham. The consequence of retaining these powers in other assets is open to interpretation and the attitude of the court.

One trust in which retained powers caused trouble ended up with the settlor, a Mr. Lawrence, spending time in prison. In this case (279F.3d1294 (11th Cir). 2002) Mr. Lawrence was faced with an arbitration judgment against him worth $20.4 million. This was a serious blow to his pride and his wealth and his attempt to safeguard $7 million two months before the arbitration judgment, by placing it in trust in Mauritius, caused him considerable difficulties. Six years after the arbitration judgement, Mr. Lawrence applied for discharge of the judgment in the Miami Bankruptcy Court claiming that the assets in the hands of trustees were not part of the bankruptcy estate; he had, after all, transferred the funds to the trustee before the judgment. However, the court applied Florida law rather than the law of Mauritius which was the law governing the trust. The court decided that the assets in Mauritius were really property of his estate and that these assets should be turned over to the bankruptcy trustee. Lawrence claimed that this was impossible; the foreign trustee was in control. The court disagreed; and, what is more, the court ordered that Mr. Lawrence should be put in prison for civil contempt. The object of the court’s action was to coerce Mr. Lawrence to fall in with the court’s wishes and, under Florida law, at any time the court finds that such an imprisonment loses its coercive effect the court is obliged to release the person concerned. Ultimately, the District Court affirmed the Lower Court’s decision. The trust had been badly set up and that Mr. Lawrence had placed undue reliance upon it. The matters against him were that the trust had been set up during the arbitration proceedings, which was enough to hold him accountable for the arbitration judgment; the trust had been set up under the “Trust to Defraud Creditor Doctrine” which came within the Uniform Fraudulence Conveyance Act. Not only this, but the trust had been amended with a clause that Lawrence’s life interest would terminate in the event of bankruptcy and by a later amendment that he was to be regarded as an ‘excluded person’ giving up forever his beneficiary status. The trustees had also, after the bankruptcy proceedings, declared that the excluded status of Mr. Lawrence was irrevocable. The court was not impressed and agreed with the Lower Court that Lawrence had control over the trust through his retained powers, and had the power to remove and appoint trustees and exclude beneficiaries. A similar set of circumstances had occurred some years before (FTC v. Affordable Media LLC, 179F.3d 1228 (9th Cir. 1999)), in a case sometimes known as “the Anderson case” where a similar late ‘adjustment of a trust’ took place to attempt to place assets outside of a court’s judgment.

These cases show the need for settlors to be given clear advice and, above all, to be advised on the futility of setting up a trust or a foundation after the obligation has arisen or when the obligation can be foreseen as a likely event. A similar construction could be made against a founder if he attempts to place assets in a foundation after a liability arises or can reasonably be foreseen.