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An asset-protection trust is a term which covers a wide spectrum of legal structures. Any form of trust which provides for funds to be held on a discretionary basis falls within the category. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.
Whether such a trust is a Spendthrift trust on the U.S. model, a Protective trust on the Commonwealth model or another form of discretionary trust, it is more likely to be subject to challenge under the common law doctrine of sham or under specific statutory provisions if any person setting up the trust (or their spouse and their spouse in turn as in a reciprocal trust):
- can benefit under its provisions;
- is the person under risk financially;
- benefits (whether permitted or not) from the trust; or
- if the person setting up the trust is at risk financially, if bankruptcy or divorce occurs soon after the establishment of the trust.
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History of Trusts
Trusts were developed at common law in England originally to minimize the impact of inheritance taxes arising from transfers at death. The essence of the trust was to separate "legal" title, which was given to someone to hold as "trustee," from "equitable title," which was to be retained by the trust beneficiaries.
In the United States and England, a practice developed whereby trust settlors began to use "spendthrift" clauses to prevent trust beneficiaries from alienating their beneficial interests to creditors. Over time, courts were asked to determine the efficacy of spendthrift clauses as against the trust beneficiaries seeking to engage in such assignments, and the creditors of those beneficiaries seeking to reach trust assets. A case law doctrine developed whereby courts may generally recognize the efficacy of spendthrift clauses as against trust beneficiaries and their creditors, but not against creditors of a settlor.
The Asset Protection Trust
Primarily, the asset protection trust is a trust containing a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor. However, other aspects of a trust may offer what are perceived to be asset protection benefits. For example, many attorneys have recommended the use of offshore asset protection trusts, the theory being that maintaining the trust in an offshore jurisdiction makes it less likely that a creditor will pursue the beneficiary's interest in the trust in the offshore jurisdiction.
In 1989, the Cook Islands enacted the world's first asset protection trust law.1 A key feature of the Cook Islands International Trusts Act (1984) is that the settlor of a trust may establish a spendthrift trust in which the settlor is a beneficiary. In the United States and England, a common law doctrine developed to prevent trust settlors from enjoying the benefits of a spendthrift trust; it was regarded as void against public policy for a trust settlor to avoid his own debts by the mere act of establishing a trust.
The Cook Islands asset protection trust law has now been implemented in one form or another in 13 countries2 and 8 U.S. states.3 Common provisions enacted among some, but not all, of these countries are: (i) statutes recognizing the effectiveness of a spendthrift clause as applied to the settlor's own interest in the trust, (ii) a shortened statute of limitations on fraudulent transfer claims, and (iii) heightened procedural requirements for a court to determine a fraudulent transfer, including a more onerous burden of proof for the creditor to satisfy and significant bonding requirements.
Offshore Jurisdictions
Some offshore jurisdictions have short periods of statutory limitation. Belize, for example, offers immediate protection from court action initiated by creditors which challenges the settlor’s transfer of property into the trust.4 Other jurisdictions have waiting periods as short as a year, such as Nevis, which allegedly prevent claims against the trust. Nevis also requires a creditor to deposit $25,000 Nevis dollars (equal to $12,500 US Dollars) in the court registry to challenge a Nevis Trust. Others offer packaged "asset protection vehicles" which may involve a corporate vehicle or other form of legal entity rather than a trust to hold the property.
Offshore trusts and other asset protection vehicles typically do not prevent action against the individual concerned in his or her home country. Orders under divorce and creditor protection laws can typically be made against that individual notwithstanding the alleged independence of such trustees. If a judge determines that the trust settlor controls the assets of the offshore trust, the judge may order the settlor to repatriate the trust assets. Failure to comply with the court's order may lead to a finding of contempt of court and imprisonment.
It is important to note that there are rigorous US tax reporting requirements that apply to taxpayers who establish offshore trusts. While no additional tax is usually imposed, there will have to be full disclosure of all trust assets and activities on the U.S. contributor's tax returns, so confidentiality is usually not an advantage under these arrangements.
References
- ^ Cook Islands International Trusts Act, 1984. A copy of the Act may be found at http://www.southpacgroup.com.
- ^ These countries include the Cook Islands, Nevis (part of St. Kitts and Nevis), Belize, St. Vincent and the Grenadines, the Bahamas, Anguilla, the British Virgin Islands, and the Cayman Islands, among others.
- ^ These states include Delaware, South Dakota, Missouri, and Alaska, among others.
- ^ http://www.compassgroupbz.com/our-services.html
See also
Wikipedia content modification information:
- This page was last modified on 20 November 2008, at 13:57.
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