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Zombie Trusts – Russia in the Crosshairs

EU Ban on Trusts for Russians

Given the EU’s ban on providing trust services to Russian nationals and residents, individuals and advisors have been searching for alternative structures. These are not perfect substitutes and carry legal complexities and risks under current sanctions. The choice depends on the original purpose of the trust.

  • Succession Planning / Controlled Inheritance: Passing assets to the next generation under specific rules.
  • Asset Protection: Shielding assets from creditors, litigants, or political risk.
  • Privacy / Confidentiality: Keeping financial affairs discreet.
  • How it works: A principal grants authority to an agent to act on their behalf.
  • Pros: Simple, private, and customizable.
  • Cons: Not a holding structure; assets stay in the principal’s name. Powers may end upon incapacity unless durable. Offers no inheritance planning.

EU sanctions are broad, and service providers in the EU and in aligned jurisdictions (Switzerland, UK, Liechtenstein) are extremely cautious.

Regulators will assess substance. If a foundation or insurance wrapper effectively replicates a trust for a sanctioned Russian, it may be considered a sanctions violation.
A unit-linked life insurance policy holds financial assets inside an insurance wrapper, with designated beneficiaries.

  • Pros: Strong creditor protection in many jurisdictions; efficient inheritance outside probate.
  • Cons: Suited mainly for financial portfolios, not operating businesses or real estate; limited distribution flexibility.
  • How it works: Holding assets directly in a jurisdiction with strong legal protections.
  • Pros: Simple and avoids intermediaries.
  • Cons: No insulation from personal legal issues; assets remain exposed and fully part of the estate.

Many banks and fiduciary firms have simply terminated all Russia-linked relationships regardless of structure.

There is no simple, risk-free trust alternative under EU sanctions. For inheritance planning, a foundation or corporate holding structure is the closest functional equivalent but faces challenges. For financial portfolios, an insurance wrapper may be the most viable option.

They are deeply concerned, depending largely on their immigration strategy, asset status, and relationship with the Russian state.

1. Automatic Exchange of Information (AEOI) – The “Blast Radius” Problem AEOI, primarily under the Common Reporting Standard (CRS), is a systemic exchange of financial account data between jurisdictions. For wealthy Russians, it creates multiple layers of exposure.

  i. Loss of Anonymity: Many who fled to the UAE, Turkey, Armenia, Georgia, or Kazakhstan assumed these countries lacked AEOI ties with Russia. However, most have since joined the CRS network. When opening accounts, banks require tax residency declarations, and those countries now share financial data with their AEOI partners.

 ii. The Russian Tax Residency Trap: Even abroad, individuals may still qualify as Russian tax residents under the 183-day rule or if their “centre of vital interests” remains in Russia. If classified as such, their new host country (e.g., the UAE) could automatically forward their financial data to the Russian Federal Tax Service (FTS).

 iii. Revealing the Full Picture: AEOI reports balances, interest, dividends, and gross proceeds, giving the FTS insight into offshore wealth. This data can be used for tax claims, identifying currency-control breaches (e.g., undeclared transfers abroad), or political pressure on individuals and families remaining in Russia.

2. Exchange on Request (EoR) – The “Targeted Missile” Fear Unlike AEOI’s broad net, EoR is targeted—triggered by investigations from the FTS, Prosecutor General’s Office, or Investigative Committee. It can be weaponized against perceived “enemies of the state,” compelling countries like Armenia to share data or risk breaching tax treaties. EoR requests can expose beneficial ownership structures, trusts, and complex networks, potentially leading to asset tracing and confiscation.

i. Formalizing emigration The most crucial step is to legally break Russian tax residency. This involves:

• Spending fewer than 183 days in Russia.• Formally demonstrating that the “centre of vital interests” (family, permanent home, economic ties) is now located outside Russia.• Formally renouncing Russian citizenship, although this is a drastic step with its own complications.

ii. Choosing “safe” jurisdictions Seeking countries with favorable tax regimes and, crucially, no AEoI with Russia. While the global CRS network is extensive, some jurisdictions are perceived as safer or more discreet. Other non-CRS or less transparent jurisdictions remain attractive, but they often carry higher risks and lower stability.

iii. Complex asset structuresThey use layers of companies, trusts, and foundations in various jurisdictions to obscure beneficial ownership. The objective is to make it difficult for any single country to form a complete picture to report or to respond accurately to an EoD request.

iv. Asset diversificationMoving wealth into asset classes that are harder to report — such as real estate (OECD just introduced Framework for AEoI on immovable assets), art, gold, or digital assets like cryptocurrencies (noting new regulations such as the Crypto-Asset Reporting Framework).

ConclusionWealthy exiled Russians are deeply concerned about both AEOI and EoR. AEOI represents a systemic risk that their new financial lives will be transparently visible to Moscow, especially if they have not cleanly severed their tax-residency ties. EoR represents an existential threat that can be deployed selectively against them if they become a target of the state. Their primary defense is a race to demonstrably sever fiscal ties to Russia and to shield their wealth within complex international structures before the Russian state decides to deploy the powerful tools of international tax transparency against them.

Amended Article 5m of Council Regulation (EU) 833/2014
  1. It is prohibited to register, provide a registered office, business or administrative address, or management services to a trust or similar legal arrangement where the settlor or beneficiary is:
 a) A Russian national or a person residing in Russia; b) A legal person, entity, or body established in Russia; c) A legal person or entity directly or indirectly owned (over 50%) by persons in (a) or (b); d) A legal person or entity controlled by persons in (a), (b), or (c); e) A person or entity acting on behalf or under the direction of any of the above.
 
2. It is also prohibited to act, or arrange for another to act, as trustee, nominee shareholder, director, secretary, or similar for a trust or similar legal arrangement as defined above.
 
Meaning of “similar legal arrangement to a trust” There is no single EU-wide definition. Such arrangements should be assessed by comparing their structure or function to a trust — particularly the fiduciary relationship and the separation of legal and beneficial ownership. Reference may be made to Directive (EU) 2015/849 on anti–money laundering and the Commission’s report on trusts and similar arrangements. However, the scope of “similar legal arrangements” under Article 5m is broader than that of the Directive.
Prohibited activities EU persons may not register new trusts or similar legal arrangements. Where registration is required under national law, such registration is barred. For existing trusts or similar arrangements, Article 5m(1) prohibits providing a registered office, business or administrative address, or management services, and Article 5m(2) prohibits providing trustee or equivalent services.

A custodial institution is not the same as a fiduciary service, though they are closely related, and a custodian can act as a fiduciary. All fiduciaries are custodians of something (assets, trusts, or information), but not all custodians are fiduciaries.
 
1. Custodial Institution (“Vault Keeper”) The custodian’s role is to safeguard assets.Core Function: Holding and protecting client assets from loss or theft.Key Responsibilities: • Physical and electronic safekeeping of assets. • Settling trades and processing corporate actions (dividends, stock splits). • Providing statements and transaction records.Standard of Care: High duty of care focused on safety and accuracy.Analogy: Like a bank’s safety deposit box—it holds valuables securely but doesn’t decide what you should do with them.
 
2. Fiduciary Service (“Trusted Advisor”) A fiduciary’s role is to act in the client’s best interest.
Core Function: Providing advice or making decisions solely for the client’s benefit.
Key Responsibilities: Managing portfolios and exercising discretion over assets.
Standard of Care: The fiduciary duty—highest legal standard, including:
  • Duty of Loyalty: Client interests come first.
  • Duty of Care: Prudent, informed decisions.
  • Duty of Good Faith: Honesty and fairness.

Analogy: A financial advisor who manages your portfolio based on your goals.

Custodian vs. FiduciaryThe custodian holds assets securely while the client retains decision-making power. The fiduciary actively manages and makes decisions for another’s benefit.
 
Overlap:Institutions like Fidelity or Vanguard act as custodians for client accounts but become fiduciaries when managing portfolios. A trustee is both—responsible for safeguarding and managing assets in beneficiaries’ best interests.

Top Company (Custodial Institution):The articles and memorandum allow the shares to be automatically transferred to third parties (family) upon the death of the initial shareholder.This is not equivalent to a trust because there is no fiduciary bond. It is a custodial relationship, and the owner is not a third party. Not subject to sanctions.Its place of effective management is Svalbard (a CRS non-participating jurisdiction).Therefore, it is a non-reporting Financial Institution for all CRS-participating jurisdictions and has no CRS reporting obligations.

Bottom Company (Professionally Managed Investment Entity):Its classification depends on its own activities and management. Because its portfolio is managed by a bank (a Financial Institution), it qualifies as an Investment Entity regardless of its shareholder.Therefore, it is a Financial Institution. The bottom company (the Investment Entity) has an equity interest held by the top company (the Custodial Institution in Svalbard).CRS rules state that an equity interest is not a “Financial Account” if held by a Financial Institution, unless it is an Investment Entity in a non-participating jurisdiction.

Conclusion:The equity interest held by the top company is not reportable because the custodial institution is located in a CRS non-participating jurisdiction. Therefore, the bottom company sees its owner as a Non-Reporting FI and has no obligation to look through it or report controlling persons. The Russian resident shareholder is not reported because the owning entity is a Non-Reporting FI, breaking the reporting chain. The bottom Investment Entity has no reporting obligation. There is no EoD on this structure because the PSC is resident in Svalbard, which has no tax agreements with any country.

While both structures involve holding assets for others, they operate on different legal principles. The key distinction is the nature of the legal relationship and the level of discretion granted.

Core Analogy: Safe Deposit Box vs. Personal ChefCustodial Institution = Safe Deposit Box Manager • Provides a secure place for assets. • Cannot touch or manage assets without direct instruction. • Primary duty is safekeeping.

Fiduciary Structure = Personal Chef with Power of Attorney• Given authority to act for your benefit.• Can buy/sell assets and manage the portfolio without seeking constant permission.• Primary duty is prudent management and loyalty.

Custodial Institution vs. Fiduciary StructureCore Legal Relationship• Custodian: Bailor–Bailee / Principal–Agent. Contract for safekeeping and execution based on instructions.• Fiduciary: Fiduciary–Beneficiary. A relationship of trust and good faith; must act in the beneficiary’s best interests.

Key Duty • Custodian: Safekeeping and precise execution. • Fiduciary: Loyalty and prudence.

Discretion & Control • Custodian: Low/none. No discretion to buy, sell, or manage assets. • Fiduciary: High. Makes decisions judged to be in the beneficiary’s best interests.

Primary Role • Custodian: Holder of assets; operational. • Fiduciary: Manager of assets; judgment-based.

Common Examples • Custodian: Banks, brokerages, central securities depositories. • Fiduciary: Trusts (trustees), estates (executors), guardianships (guardians).

Liability Focus • Custodian: Negligence (loss, failure to execute, poor security). • Fiduciary: Breach of fiduciary duty (conflicts, self-dealing, imprudent decisions).

Client Relationship • Custodian: Client directly owns the assets and gives instructions. • Fiduciary: Client grants control; beneficiaries benefit but may not control assets.

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Derren works with International Entrepreneurs, Expats and Investors who are exposed to multiple jurisdictions. Tax optimization. Asset Protection. Compliance Obligations. Strategies include second citizenships, second residencies, trusts, foundations, insurance wrappers and other offshore structures.

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