How Does a Trust Work? What It Can and Can't Do

13 October 202617 min read

A leather-bound book and a pen on a desk overlooking the Dubai skyline

How does a trust work? Settlors, trustees, trust types, the main trust jurisdictions, and the mistakes that make trusts fail when they're tested.

Key takeaways

In a trust, legal ownership passes to the trustee. If you keep control in practice, courts can treat the assets as still yours.
A trust set up after a claim has arisen can usually be challenged, however good the jurisdiction.
Trusts aren't secret: banks report them under CRS, and trustees must hold beneficial ownership information.
Many civil-law countries have no trusts of their own and may tax a foreign trust in unexpected ways.
ADGM and DIFC offer common-law trust regimes inside the UAE, and Liechtenstein has had its own trust law since 1926.

You've probably heard someone say it over dinner: "It's all in a trust now." It usually comes with a sense of relief, as if the assets had gone into a vault that no creditor, ex-spouse or tax office could open. It's a comfortable belief, and often a wrong one. The question "how does a trust work?" sounds basic, but the answer decides whether your structure holds on the day it's tested by a lawsuit, a divorce, a tax audit or a dispute among heirs. A trust is a legal relationship between people, and it protects only as well as it was designed, timed, documented and run.

Below you'll find how trusts work and where they're set up, the mistakes that make them fail, and how transparency rules and civil-law countries affect them.

What is a trust, and how does a trust work?

A trust is an arrangement in which one person, the settlor, transfers assets to another, the trustee, who holds and manages them for the benefit of others, the beneficiaries, under rules set out in a written document.

The key idea is that legal ownership moves. When you settle shares in your holding company into a trust, your name comes off the share register and the trustee's name goes on. The trustee becomes the legal owner, but must use those assets only for the beneficiaries and in line with the trust's terms, and owes them strict fiduciary duties. A trust usually has no legal personality of its own, so contracts and bank accounts are held in the trustee's name, acting as trustee.

Say you set up a trust for your family. You are the settlor, and once the transfer is made, your formal role is largely over, which is exactly the point. Your children, or a wider class such as "the settlor's descendants", are the beneficiaries, and they can hold the trustee to account in court. You might appoint a protector, often a trusted adviser, whose consent the trustee needs for major steps such as adding a beneficiary or replacing the trustee.

Two documents sit behind all this. The trust deed is the trust's constitution: governing law, powers, beneficiaries and how the trust ends. The letter of wishes is a non-binding note in which you tell the trustee, for instance, that you'd like the family business kept intact until your youngest turns 30. It should stay guidance, because the trust is safer that way.

What types of trust are there?

The distinctions that matter most in practice are discretionary versus fixed, revocable versus irrevocable, and the special category of asset protection trusts.

Discretionary trust vs fixed trust

In a fixed trust, each beneficiary's share is set in the deed, for example a third of the income to each of three children. In a discretionary trust, the trustee decides who receives what and when, within a defined group. Most international family trusts are discretionary. When a family lives under several tax systems, that flexibility is valuable, and a beneficiary with no fixed entitlement has nothing concrete for a creditor to seize.

Revocable vs irrevocable trusts

A revocable trust can be cancelled by the settlor, who then gets the assets back. It's common in the United States as a way to avoid probate, the court process for settling an estate, but it offers almost no protection: if you can take the assets back, a court can order you to. An irrevocable trust can't be unwound by the settlor alone. Many entrepreneurs find that loss of control uncomfortable, yet it's where the protection comes from.

Asset protection trusts

An asset protection trust is usually an irrevocable discretionary trust governed by a law with deliberately creditor-unfriendly rules. The Cook Islands' International Trusts Act 1984 is the best-known example. Creditors get very short windows to challenge a transfer, must prove intent to defraud beyond reasonable doubt, and have to start a fresh case locally because foreign judgments against these trusts aren't enforced.

These rules are real but often oversold. They help most against creditors who don't exist yet, and they don't stop a court at home from acting against you personally. In a well-known US case from 1999, FTC v. Affordable Media, a couple who had moved money into a Cook Islands trust were jailed for contempt after claiming they couldn't bring it back, while holding roles the court saw as giving them that control.

What are trusts actually used for?

Trusts are mainly used to keep wealth together across generations, to protect particular family members, and to hold businesses and property under one coordinated structure.

Succession is the most common reason. Without a structure, a company built by one person often ends up split among heirs with different ambitions, living in different countries. A trust can hold the shares as a single block under clear rules for dividends and decisions. Because a trust doesn't die, the assets avoid probate in each country where they sit, and some jurisdictions, including Jersey and the DIFC, allow trusts to last indefinitely.

Protection of family members comes next. A trust can support a child with a disability for life, hold back large sums until a young beneficiary is ready, or keep family assets at arm's length from a beneficiary's marriage or business risks.

Trusts often sit on top of a holding company that owns operating companies or real estate. Modern laws, Jersey's among them, let the settlor reserve powers such as directing investments or appointing directors, but every power you keep weakens the separation the trust relies on.

For families spread across countries, a trust can replace several competing succession regimes with one set of rules. DIFC law, for instance, says a DIFC trust can't be challenged on the basis of foreign forced heirship rules, which reserve fixed shares of an estate for certain relatives. The exception people overlook is real estate, which is generally governed by the law of the country where it sits, whatever the trust deed says.

Where are offshore trusts set up?

Most international trusts are governed by the law of a specialist jurisdiction with a modern trust statute, experienced courts and regulated trustees. The best known include Jersey, Guernsey, the Cayman Islands, the Cook Islands, Singapore and Liechtenstein, and more recently the UAE's two common-law financial free zones, ADGM and DIFC.

"Offshore trust" is a loose label, since Singapore and Liechtenstein are hardly offshore. What these places share is trust law built for cross-border use, including "firewall" provisions that stop foreign law from undermining a trust governed by local law.

Comparison as of October 2026:

Jurisdiction	Legal basis	Typical use	Reputation	Reporting and transparency
Jersey	Trusts (Jersey) Law 1984; firewall and reserved-powers provisions	Family succession, holding structures, private trust companies	Long-established, heavily regulated Crown Dependency	Trustees regulated by the JFSC; CRS participant; no public trust register
Guernsey	Trusts (Guernsey) Law 2007	Family and corporate structures	Long-established, similar profile to Jersey	Fiduciaries licensed by the GFSC; CRS participant; no public trust register
Cayman Islands	Trusts Act (2021 Revision); STAR trusts for purposes and persons	Family wealth, commercial and fund structures	Major financial centre, strong in institutional work	Trust companies licensed by CIMA; exempted trusts registered with the Registrar of Trusts; CRS participant
Cook Islands	International Trusts Act 1984	Asset protection	Most creditor-resistant regime, and the most scrutinised	International trusts registered via licensed trustee companies supervised by the FSC
Singapore	Trustees Act 1967 and English-derived common law	Asian and international family wealth	Major onshore financial centre	Licensed trust companies regulated by MAS; trustees must hold and produce beneficial ownership information; no public register
Liechtenstein	Trust law in the Persons and Companies Act (PGR) since 1926; reformed with effect from 1 July 2026	Family wealth and succession, often for German-speaking families; foundations are more common	Long-established civil-law wealth centre, now heavily regulated	Professional trustees licensed by the FMA; trusts entered in the register of beneficial owners; CRS participant
DIFC (Dubai)	DIFC Trust Law No. 4 of 2018 (as updated); DIFC Courts	Succession and holding structures for UAE-based families	Newer regime with a common-law court	No general registration; trustees keep beneficial ownership records and provide them to the Registrar on request
ADGM (Abu Dhabi)	English common law applied directly; Trusts (Special Provisions) Regulations 2016	Succession and holding structures for UAE-based families	Newer regime with direct English-law basis	No formal registration; trustee generally in ADGM or subject to ADGM Courts; UAE AML record-keeping applies

If you live in the UAE, the two local options deserve a closer look. Onshore UAE law is civil law and has no trust in the common-law sense, so DIFC and ADGM fill the gap with their own trust regimes and courts. Neither is a shield against creditors, though. Under DIFC law, if a settlor transferred assets intending to defraud a creditor and was left insolvent, the trust must satisfy that creditor's claim, and ADGM's courts can refuse to uphold arrangements that are fraudulent or a sham. ADGM's own beneficial ownership rules also require a professional trustee to hold accurate, current information on the trust and to produce it to the Registrar on request, and the Registrar's powers over trusts connected to ADGM were widened in 2026. The federal anti-money-laundering framework, rebuilt in 2025, adds a minimum five-year record-keeping period on top of that.

The jurisdiction gets most of the attention, but the trustee, the way the trust is run and your home country's view of it usually matter more.

Why do trusts fail when they're needed most?

Most trusts fail for avoidable reasons: the settlor never really let go, the trust came after the trouble, the paperwork didn't match reality, the trustee was the wrong choice, or nobody checked how the family's home countries see the structure.

Keeping too much control

A sham trust is one where settlor and trustee never intended the deed to describe what really happens, and the trustee simply follows instructions. Courts don't even need to prove a sham to look through a trust. In a 2017 English case involving New Zealand trusts, JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev, the settlor had kept extensive powers, partly through his role as protector, and the court held that the assets were effectively still his. The warning signs show up in daily practice, such as a trustee who has never said no or private bills paid from the trust account.

Setting it up too late

Timing matters more than location. In England, a court can unwind a transfer made to put assets beyond the reach of a current or future claimant, and the statute sets no fixed look-back period. Even the Cook Islands' short windows run the other way round from what most people assume: a transfer only moves out of reach once more than two years have passed since the creditor's claim arose, or once the creditor has let a year go by without bringing proceedings. Once a demand letter has arrived, a transfer sits squarely inside both windows, and a new trust tends to read as evidence of intent.

Poor documentation and the wrong trustee

A trust can only hold what was actually transferred to it, and shares never re-registered or a bank account still in the settlor's name are surprisingly common. Missing trustee minutes are another weak point: with no record that the trustee independently considered a distribution, a challenger will argue it never did. The trustee itself matters just as much. A loyal family friend is unlikely to understand fiduciary duties or the personal liability attached, and a provider that rubber-stamps every request builds exactly the pattern a sham argument needs. You want a trustee that can, and occasionally will, disagree with you.

Illustrative scenario (not a client case): An entrepreneur living in Dubai sells part of his business, and in March a former co-founder's lawyer writes to dispute the price. In October he settles a discretionary trust under a well-regarded offshore law, moving in a EUR 4 million portfolio and the shares of his holding company. He names himself protector with the power to replace the trustee at any time, and his letter of wishes asks the trustee to follow his guidance on all investments. Over the next year the trustee approves every request, including payments for his villa. When the co-founder wins a judgment two years later, the claimant has three lines of attack: the timing, the retained control and a documented history of the trustee taking orders. His two adult children, meanwhile, live in Germany, where the trust's income may be attributed to them for tax purposes although they've received nothing. Set up five years earlier, with an independent trustee and minuted decisions, the same trust would have stood on far firmer ground, though nothing could have guaranteed the outcome.

Are trusts secret?

No. Trusts are private in the sense that there's usually no public list of beneficiaries, but the information is collected by and shared with authorities across most of the world.

The main channel is the Common Reporting Standard (CRS), the OECD framework under which more than 100 jurisdictions, the UAE included, automatically exchange financial account information. When a trust holds a bank account, the bank identifies its "controlling persons", meaning settlor, trustees, protector and beneficiaries, and reports them to their countries of tax residence.

Beneficial ownership records add a second layer. EU anti-money-laundering rules require registers of trust beneficial owners, and since the EU Court of Justice struck down unrestricted public access in November 2022, these have been open mainly to authorities, banks and others with a legitimate interest. Singapore and ADGM require trustees to hold the information and produce it on request. Privacy from the public is a fair aim, but secrecy from the authorities isn't on offer, and a structure that only works if nobody finds out is badly designed from the start.

How do civil-law countries treat a foreign trust?

Often very differently from the country where the trust was set up, and this is where many international structures run into trouble.

Germany, Austria, France and Spain, like most civil-law countries, have no trust in their own law. The 1985 Hague Convention on the recognition of trusts was meant to bridge that gap, but only 14 states have joined, among them Italy, the Netherlands, Switzerland, Luxembourg, Liechtenstein and the UK. Germany, Austria and Spain aren't parties, and France signed without ratifying. Liechtenstein is the exception among civil-law states, having written the trust into its own law in 1926. Luxembourg recognises foreign trusts and has a similar fiduciary contract, the fiducie, but no trust law of its own.

Each country therefore fits a foreign trust into its own concepts. Germany treats many foreign trusts as a "foreign pool of assets": funding one can trigger gift tax, and under its foreign-tax rules the trust's income can be attributed to a German-resident settlor or beneficiary even when nothing has been paid out. Other countries may treat the same trust as transparent, as a company or as an ongoing gift.

The answer also changes when people move. A structure that works while the whole family lives in the UAE can look very different once a child takes a job in Munich or Paris. It has to be checked for every country involved, with qualified tax advisers in each, before the trust is set up and again whenever someone relocates.

Is a foundation the better choice?

For families from civil-law countries, a private foundation is often the more natural fit. Unlike a trust, a foundation is a legal entity that owns its assets itself and is run by a council under a charter, a concept civil-law courts and tax offices tend to handle more comfortably. Liechtenstein and Panama are long-standing foundation jurisdictions, and DIFC and ADGM both offer foundation regimes next to their trusts. Which vehicle suits a family depends on its assets and the countries involved, and the comparison deserves careful treatment of its own.

Why should a trust be planned together with your company, residency and banking?

Because a trust touches every other part of your setup, and a decision that makes sense in one area can quietly undo another.

A bank opening an account for a trust-owned company will want the full ownership chain and the source of the wealth that went in, and a trust built without that in mind can stall the account for months. A change of tax residence, yours or your children's, can change how the trust is taxed overnight. A trust holding a UAE operating company has to fit that company's licence, its substance and the UAE corporate tax rules. That's why at GWS we look at asset protection and succession together with company structure, tax residency and banking, and coordinate specialist legal and tax partners for the parts that need their advice.

Who this is for, and who it isn't for

A trust is worth exploring if you hold significant assets beyond your day-to-day needs, especially a business or property portfolio you'd like kept together after your death, if your family lives across several countries, or if a beneficiary needs protecting. It suits people ready to give up real control and to accept the ongoing cost and paperwork of a professional trustee.

It's the wrong tool if you're already facing a claim and hope to move assets out of reach, because the trust will probably fail and may make your position worse. It's also a poor fit if you want to keep full control, or if a well-drafted will would do the job; in the UAE, a will registered in the DIFC is a common route for non-Muslim expatriates. And a trust won't hide assets or cut tax while everything else in your life stays the same.

Conclusion

A trust can hold a family's wealth together across generations and borders, provided it's treated as a real transfer rather than a label. The decisions that count are made early: giving up control, acting before any claim exists, appointing a trustee who will genuinely exercise judgment, and checking in every country where the settlor and beneficiaries live how the trust will be taxed and recognised. The choice of jurisdiction comes only after that, and for some families the honest answer will be a foundation or something simpler.

FAQ

Can a trust for asset protection be challenged?

Yes. Transfers made to defeat existing or foreseeable creditors can be unwound in many countries, and trusts where the settlor kept effective control can be treated as the settlor's own assets. Even strongly protective jurisdictions mainly help against future, unforeseen claims.

Does putting assets into a trust save tax?

Not by itself. Tax depends on where the settlor and beneficiaries live and how those countries treat the trust. In some countries, funding a trust or receiving its income triggers tax.

Can I be a beneficiary of my own trust?

Many trust laws allow it, but it weakens protection and can affect tax treatment in your home country. The more benefit and control you keep, the easier it is to argue that the assets are still yours.

What is the difference between a trust and a foundation?

A trust is a relationship in which the trustee owns the assets for the beneficiaries. A foundation is a legal entity that owns its assets itself. Foundations are often easier to explain to civil-law courts and tax offices.

Do trusts have to be registered in the UAE?

In ADGM, no formal registration is required, and in DIFC there's no general registration requirement. In both, however, trustees must keep beneficial ownership records and provide them to the authorities when asked.

Want to know more?

If you're weighing whether a trust or another structure fits your family and assets, you're welcome to book a call with our team.

Sources

About Global Wealth Strategy

Global Wealth Strategy (GWS) is an independent international advisory firm based at the Dubai World Trade Centre. Founded in Germany in 2018 and now headquartered in Dubai, GWS helps entrepreneurs, investors, high-net-worth individuals and families bring structure to their international lives: from company structuring and banking to asset protection, real estate, residency and succession. Every engagement starts with a clear roadmap across the areas that matter for the client, and GWS can implement it end to end. Our advisory is fee-based and independent, and we work alongside specialist legal and tax partners to turn complex cross-border situations into clear, coordinated strategies.

Disclaimer: This article is for general information only and does not constitute legal, tax or financial advice. Rules and requirements change, and outcomes depend on individual circumstances. Please seek qualified professional advice before acting.

Your situation,considered.

Questions about your own situation?

Speak to us