Asset-protection trust
Encyclopedia
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.
In the United States and England, a practice developed whereby trust settlor
s 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.
planning, i.e. to insulate assets from claims of creditors without concealment or tax evasion
.
Such trusts must be irrevocable (a revocable trust will not provide asset protection because and to the extent of the settlor's power to revoke). Most of them contain a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor. The spendthrift clause has three general exceptions to the protection afforded: the self-settled trusts (if the settlor of a trust is also a beneficiary of a trust), the case when a debtor is the sole beneficiary and the sole trustee of a trust, and the support payments (a court may order the trustee to satisfy a beneficiary's support obligation to a former spouse or minor child). The first general exception, which accounts for the majority of asset protection trusts, no longer applies in several jurisdictions. Certain nations and certain United States now allow self-settled trusts to afford their settlors the protection of the spendthrift clause.
Trusts are generally governed by the laws of the jurisdiction that is designated by the settlor as the governing jurisdiction. There are two exceptions to the general rule, which may create conflicts of law: (i) states will not recognize laws of sister states that violate their own public policy, and (ii) if the trust owns real property, such property will be governed by the law of jurisdiction that is the property's situs. Additionally, the Full Faith and Credit clause
of the Constitution provides that each state must give full faith and credit to the laws of every other state. This means that if a court from another state refuses to recognize the protection of a DAPT and enters a judgment for the creditor, the creditor may be able to enforce the judgment against the trustee of the DAPT, even if that trustee was located in the DAPT jurisdiction. The efficacy of a DAPT may also be challenged under the Supremacy clause of the U.S. Constitution, under the applicable fraudulent transfer
statute, or because the settlor retained some prohibited control over the trust.
These jurisdictions are also known as United States Asset Protection Trusts (USAPTs), from the point of view of the non-US settlors. The issues that would seem to apply on a USAPT established by a non-US settlor are: 1) whether a non-US court has jurisdiction over the USAPT; 2) the conflict of US versus non-US laws (i.e., which jurisdiction's laws will apply to the trust and the protection it purports to offer); 3) which fraudulent transfer law would apply; and 4) whether the US state court will recognize the non-US judgment.
The context of a non-US settlor has a few advantages over that of a US settlor. The issue of the Full Faith and Credit clause doctrine of the US Constitution would not apply to a non-US settlor facing a non-US judgment. Creditors of non-US settlors would have to first obtain a judgment in their home jurisdiction and then attempt to enforce that "foreign" judgment in the US against the trustee of the USAPT, who was not a party to the original action. Therefore, except in unusual cases, this would mean that the only issues to litigate would be whether a fraudulent transfer has taken place, and in turn, which jurisdiction’s fraudulent transfer laws would apply. Despite that, the non-US creditor must still seek to first have the foreign judgment recognized, because without formal legal acknowledgment of the judgment in the US court, there would be no basis on which to question the transfer.
South Dakota can be distinguished from these other states by its modern trust laws coupled with the fact that it does not impose any form of state taxation on the assets that comprise a trust located there. This includes, but is not limited to: no state income, capital gains, dividend/interest and/or intangible's taxes. Additionally, South Dakota has the lowest insurance premium tax of any state (i.e. 8 basis points or 8/100ths of 1%) and also offers other very favorable insurance legislation. South Dakota also has both excellent self-settled trust as well as Third Party Discretionary trust statutes, both allowing for domestic asset protection planning with trusts.
South Dakota is the first and only state in the U.S. with a Third Party Discretionary Trust statute for asset protection, which states that a discretionary interest in third party trust, limited power of appointments, and remainder interests are not considered property interests. This statute is extremely important to properly asset protect trusts set up to benefit one's family. South Dakota also has some of the top-rated Asset Protection statutes for LLCs and LPs based upon a powerful "sole remedy charging order statute". Consequently, most of the unique and creative trust strategies for the wealthy involve trust administration in South Dakota without the necessity of having the trust's family reside there.
According to Jacob Stein
's treatise on asset protection, common provisions enacted among some, but not all, of these countries are: (i) there is no recognition of foreign judgments with respect to trusts; (ii) there is a very short statute of limitations
on fraudulent transfers; (iii) to establish a fraudulent transfer the creditor must show that the debtor was insolvent, and must establish the debtor's intent to "hinder, delay or defraud" beyond a reasonable doubt; (iv) the anti-duress provisions are incorporated into the statutes; and (v) spendthrift protection is extended to self-settled trusts. These jurisdictions also offer the additional advantages of (i) not being subject to the U.S. constitutional issues like the Full Faith and Credit clause; (ii) using the English common-law legal system; (iii) having abolished the rule against perpetuities
; and (iv) not allowing trusts to be pierced for child or spousal support.
With a British common law tradition and English as the primary language, the Cook Islands has an active offshore bank
ing sector attractive to Asians and North Americans. Major offshore-licensed banks in the Cook Islands include Australia and New Zealand Banking Group (ANZ) and Capital Security Bank. The confidentiality laws of the Cook Islands prohibit the disclosure of trust and banking relationships except with the consent of the customer, ensuring that no creditor or foreign government can gain access to bank or trust information except in cases of preventing money laundering or averting the financing of terrorism.
The Cook Islands was the first country to enact an explicit asset protection law, implementing particular provisions in 1989 to its International Trusts Act. Several of these changes have been adopted in one form or another in several other countries and a handful of a U.S. states. The most important of these changes permits the settlor of a trust to be named as a spendthrift beneficiary.
The trust laws of the Cook Islands provide a shortened statute of limitations on fraudulent transfer claims. While most U.S. states have a four year statute of limitations (and the Statute of Elizabeth in some common law jurisdictions has no statute of limitations), the general statute of limitations in the Cook Islands is reduced to two years for fraudulent transfers; in certain circumstances, it may be as short as one year. If the trust is funded while the settlor is solvent, then the transfer cannot be challenged (i.e., there is no time period for the creditor to challenge the transfer).
Several provisions of the Cook Islands law specify the form of pleading that a creditor must establish in order for its claim to be heard in a Cook Islands court. The effect of these provisions is to raise the burden of proof to "beyond a reasonable doubt," something akin to a criminal law standard, in order for a creditor to establish a fraudulent transfer. The "constructive" fraudulent transfer theories are eliminated under Cook Islands law, requiring the creditor to prove that the transfer was made with specific intent to avoid the creditor's claim.
It is believed that the Cook Islands now has more registered asset protection trusts than any other country. Along with a body of case law that has interpreted major provisions of its trust law, many lawyers find the Cook Islands to be the premier jurisdiction for asset protection planning. Recently enacted LLC legislation in the Cook Islands includes some asset protection features that are likely to keep the Cook Islands popular among asset protection attorneys.
Very little case law exists in Nevis, which many attorneys interpret to mean that creditors are effectively deterred from bringing suit in Nevis. It has a small offshore banking industry, with St. Kitts-Nevis-Anguilla Bank and Bank of Nevis International as the only licensed offshore banks.
LLC legislation modeled after the Delaware LLC Act was passed in 1996. This has enabled Nevis to distinguish itself as a primary offshore jurisdiction for LLC formations, as opposed to other countries that are well known for IBC formations (British Virgin Islands) or trust formations (Cook Islands). A Nevis LLC is often used in conjunction with an asset protection trust because it gives the creator of the trust direct control over the assets if the creator is listed as the manager of the Nevis LLC. This gives the creator added security in that it keeps the assets one step removed from the trustee of the asset protection trust. Because the managers and members of a Nevis LLC are not public information, the creator of the trust is able to assume control over the assets without making disclosing his control on any public records.
, for example, offers immediate protection from court action initiated by creditors which challenges the settlor’s transfer of property into the trust. However, due to the paucity of credible offshore banks in Belize, many trusts established in Belize hold assets with a second trustee or third-party financial institution in another country.
Many attorneys establish asset protection trusts under the laws of another country and deposit the trust assets in Switzerland or Liechtenstein. One question raised by this approach is whether a creditor can seize assets in Switzerland or Liechtenstein without having to bring a claim in the trust-protective jurisdiction. Again, a lack of precedent suggests that this is an open issue in Switzerland and Liechtenstein.
Both countries are also known for offering asset protection annuities, with a six-month statute of limitations on fraudulent transfers into an annuity. Unfortunately for most Americans, these annuities cannot invest in US securities without punitive taxation due to the offshore status of the insurance carriers that offer these annuity products. Furthermore, many lawyers peddling these annuity products to their clients collect commissions from the insurance carriers. These reasons, among others, may help explain why annuities offered in these two countries are not particularly popular with U.S. persons. This does not mean that taxpayers of other jurisdictions may not significantly benefit from holding a Swiss or Liechtenstein annuity. Also, U.S. persons may benefit from holding an annuity issued by a carrier in an asset-protective jurisdiction (such as the Cook Islands), particularly if the carrier is an electing 953(d) carrier (a reference to a provision of US tax law).
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):
Offshore trust
s 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. For this reason, a properly established asset protection trust should provide a clear separation between the settlor and those who exercise control over the trust assets.
In May 2008, the U.S. government sought to hold the domestic protector in contempt of court for failing to secure the cooperation of the foreign trustee to resign and repatriate the trust assets. The U.S. District Court for the Southern District of Florida ruled against the government, finding that the domestic protector could not be held in contempt for failure to gain the cooperation of the offshore trustee. In denying the government's contempt motion, the judge observed:
"I understand that it has been more than two years since the repatriation order was issued and that the funds had not yet been repatriated. But this failure is not for a lack of effort. I am reluctant to fault Mrs. Grant for her trustees' denial of her requests to repatriate the funds." U.S. v. Grant, 2008 U.S. Dist. LEXIS 51332, 101 A.F. T.R.2d (RIA) 2676 (D.C. So. Fla. 2008).
For years, lawyers have vigorously debated the vulnerability of an asset protection trust with a domestic protector. The Grant case stands for the proposition that no vulnerability exists if the domestic protector complies with the court's orders. While a domestic protector may be required to make an effort to repatriate trust assets, failure to achieve repatriation should not entail any dire consequences to the trust or to the domestic protector. As long as a duress clause permits the foreign trustee to ignore the pleas of a domestic protector acting under threat of a contempt order, the selection of a domestic protector should not jeopardize the integrity of the offshore asset protection trust.
While most attorneys draft trust agreements to limit the domestic protector's powers to those of a negative nature (i.e., the domestic protector may veto trustee decisions, but a domestic protector cannot order a trustee to do anything), the ruling in Grant implies that even positive powers exercisable by a domestic protector may not jeopardize an offshore asset protection trust containing a duress clause. Whether this leads attorneys to be more cavalier in their trust drafting remains to be seen. At least we know that traditional offshore asset protection trust planning works as anticipated.
Most asset protection trusts established by U.S. settlors are considered "grantor trusts" under U.S. income tax law, meaning that all income of the trust is reportable on the grantor's (i.e., the settlor's) individual income tax return. Asset-protection trusts do not, in and of themselves, offer any tax advantages under U.S. income tax law.
Discretionary trust
In British and Canadian law, a discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia...
falls within the category. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce
Divorce
Divorce is the final termination of a marital union, canceling the legal duties and responsibilities of marriage and dissolving the bonds of matrimony between the parties...
and bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.
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 settlor
Settlor
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
s began to use "spendthrift
Spendthrift trust
A spendthrift trust is a trust that is created for the benefit of a person that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary...
" 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.
Overview
The asset-protection trust is a trust that splits the beneficial enjoyment of trust assets from their legal ownership. The beneficiaries of a trust are the beneficial owners of equitable interests in the trust assets, but they do not hold legal title to the assets. Thus this kind of trust fulfills the goal of asset protectionAsset protection
Asset protection is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments...
planning, i.e. to insulate assets from claims of creditors without concealment or tax evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
.
Such trusts must be irrevocable (a revocable trust will not provide asset protection because and to the extent of the settlor's power to revoke). Most of them contain a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor. The spendthrift clause has three general exceptions to the protection afforded: the self-settled trusts (if the settlor of a trust is also a beneficiary of a trust), the case when a debtor is the sole beneficiary and the sole trustee of a trust, and the support payments (a court may order the trustee to satisfy a beneficiary's support obligation to a former spouse or minor child). The first general exception, which accounts for the majority of asset protection trusts, no longer applies in several jurisdictions. Certain nations and certain United States now allow self-settled trusts to afford their settlors the protection of the spendthrift clause.
Domestic asset protection trust
Alaska was the first US jurisdiction to enact laws allowing protection for self-settled trusts (in 1997) and was shortly followed by Delaware, Nevada, South Dakota and a few others. These trusts are known as Domestic Asset Protection Trusts (DAPTs). Usually, a DAPT must comply with the following requirements:- the trust must be irrevocable and spendthrift;
- at least one resident trustee must be appointed;
- some administration of the trust must be conducted in respective state;
- the settlor cannot act as a trustee.
Trusts are generally governed by the laws of the jurisdiction that is designated by the settlor as the governing jurisdiction. There are two exceptions to the general rule, which may create conflicts of law: (i) states will not recognize laws of sister states that violate their own public policy, and (ii) if the trust owns real property, such property will be governed by the law of jurisdiction that is the property's situs. Additionally, the Full Faith and Credit clause
Full Faith and Credit Clause
The Full Faith and Credit Clause is the familiar name used to refer to Article IV, Section 1 of the United States Constitution, which addresses the duties that states within the United States have to respect the "public acts, records, and judicial proceedings of every other state." According to...
of the Constitution provides that each state must give full faith and credit to the laws of every other state. This means that if a court from another state refuses to recognize the protection of a DAPT and enters a judgment for the creditor, the creditor may be able to enforce the judgment against the trustee of the DAPT, even if that trustee was located in the DAPT jurisdiction. The efficacy of a DAPT may also be challenged under the Supremacy clause of the U.S. Constitution, under the applicable fraudulent transfer
Fraudulent conveyance
A fraudulent conveyance, or fraudulent transfer, is a civil cause of action. It arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees...
statute, or because the settlor retained some prohibited control over the trust.
These jurisdictions are also known as United States Asset Protection Trusts (USAPTs), from the point of view of the non-US settlors. The issues that would seem to apply on a USAPT established by a non-US settlor are: 1) whether a non-US court has jurisdiction over the USAPT; 2) the conflict of US versus non-US laws (i.e., which jurisdiction's laws will apply to the trust and the protection it purports to offer); 3) which fraudulent transfer law would apply; and 4) whether the US state court will recognize the non-US judgment.
The context of a non-US settlor has a few advantages over that of a US settlor. The issue of the Full Faith and Credit clause doctrine of the US Constitution would not apply to a non-US settlor facing a non-US judgment. Creditors of non-US settlors would have to first obtain a judgment in their home jurisdiction and then attempt to enforce that "foreign" judgment in the US against the trustee of the USAPT, who was not a party to the original action. Therefore, except in unusual cases, this would mean that the only issues to litigate would be whether a fraudulent transfer has taken place, and in turn, which jurisdiction’s fraudulent transfer laws would apply. Despite that, the non-US creditor must still seek to first have the foreign judgment recognized, because without formal legal acknowledgment of the judgment in the US court, there would be no basis on which to question the transfer.
South Dakota
South Dakota is the top choice for a trust company because of the state's advantageous trust and tax laws, its cost-efficient and dedicated workforce, the founders' previous favorable experience and their market recognition with the state. South Dakota was one of the first states (1983) to allow a trust to endure perpetually, essentially jumping outside the onerous federal transfer (gift, estate and generation-skipping) tax system theoretically forever. Currently, twenty-four other states have joined the ranks of offering a long-term trust. Nineteen of these states, including South Dakota, allow for a trust to go on in perpetuity.South Dakota can be distinguished from these other states by its modern trust laws coupled with the fact that it does not impose any form of state taxation on the assets that comprise a trust located there. This includes, but is not limited to: no state income, capital gains, dividend/interest and/or intangible's taxes. Additionally, South Dakota has the lowest insurance premium tax of any state (i.e. 8 basis points or 8/100ths of 1%) and also offers other very favorable insurance legislation. South Dakota also has both excellent self-settled trust as well as Third Party Discretionary trust statutes, both allowing for domestic asset protection planning with trusts.
South Dakota is the first and only state in the U.S. with a Third Party Discretionary Trust statute for asset protection, which states that a discretionary interest in third party trust, limited power of appointments, and remainder interests are not considered property interests. This statute is extremely important to properly asset protect trusts set up to benefit one's family. South Dakota also has some of the top-rated Asset Protection statutes for LLCs and LPs based upon a powerful "sole remedy charging order statute". Consequently, most of the unique and creative trust strategies for the wealthy involve trust administration in South Dakota without the necessity of having the trust's family reside there.
Offshore jurisdictions
In 1989, the Cook Islands enacted the world's first asset-protection trust law. 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 countries and eight U.S. states.According to Jacob Stein
Jacob Stein
Jacob Stein is a California attorney and an authority on the subject of asset protection. His textbooks on asset protection are used by Lorman Education Services, National Business Institute, California CPA Society, and the California CPA Education Foundation...
's treatise on asset protection, common provisions enacted among some, but not all, of these countries are: (i) there is no recognition of foreign judgments with respect to trusts; (ii) there is a very short statute of limitations
Statute of limitations
A statute of limitations is an enactment in a common law legal system that sets the maximum time after an event that legal proceedings based on that event may be initiated...
on fraudulent transfers; (iii) to establish a fraudulent transfer the creditor must show that the debtor was insolvent, and must establish the debtor's intent to "hinder, delay or defraud" beyond a reasonable doubt; (iv) the anti-duress provisions are incorporated into the statutes; and (v) spendthrift protection is extended to self-settled trusts. These jurisdictions also offer the additional advantages of (i) not being subject to the U.S. constitutional issues like the Full Faith and Credit clause; (ii) using the English common-law legal system; (iii) having abolished the rule against perpetuities
Rule against perpetuities
The common law rule against perpetuities forbids some future interests that may not vest within the time permitted; the rule "limit[s] the testator's power to earmark gifts for remote descendants"...
; and (iv) not allowing trusts to be pierced for child or spousal support.
Cook Islands
The Cook Islands is an independent country joined in "free association" with New Zealand. While the Cook Islands has its own government and court system, it uses the New Zealand dollar as its functional currency, and its citizens carry New Zealand passports. It has a population of roughly 35,000, with more than half residing on its primary island, Rarotonga.With a British common law tradition and English as the primary language, the Cook Islands has an active offshore bank
Offshore bank
An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages. These advantages typically include:...
ing sector attractive to Asians and North Americans. Major offshore-licensed banks in the Cook Islands include Australia and New Zealand Banking Group (ANZ) and Capital Security Bank. The confidentiality laws of the Cook Islands prohibit the disclosure of trust and banking relationships except with the consent of the customer, ensuring that no creditor or foreign government can gain access to bank or trust information except in cases of preventing money laundering or averting the financing of terrorism.
The Cook Islands was the first country to enact an explicit asset protection law, implementing particular provisions in 1989 to its International Trusts Act. Several of these changes have been adopted in one form or another in several other countries and a handful of a U.S. states. The most important of these changes permits the settlor of a trust to be named as a spendthrift beneficiary.
The trust laws of the Cook Islands provide a shortened statute of limitations on fraudulent transfer claims. While most U.S. states have a four year statute of limitations (and the Statute of Elizabeth in some common law jurisdictions has no statute of limitations), the general statute of limitations in the Cook Islands is reduced to two years for fraudulent transfers; in certain circumstances, it may be as short as one year. If the trust is funded while the settlor is solvent, then the transfer cannot be challenged (i.e., there is no time period for the creditor to challenge the transfer).
Several provisions of the Cook Islands law specify the form of pleading that a creditor must establish in order for its claim to be heard in a Cook Islands court. The effect of these provisions is to raise the burden of proof to "beyond a reasonable doubt," something akin to a criminal law standard, in order for a creditor to establish a fraudulent transfer. The "constructive" fraudulent transfer theories are eliminated under Cook Islands law, requiring the creditor to prove that the transfer was made with specific intent to avoid the creditor's claim.
It is believed that the Cook Islands now has more registered asset protection trusts than any other country. Along with a body of case law that has interpreted major provisions of its trust law, many lawyers find the Cook Islands to be the premier jurisdiction for asset protection planning. Recently enacted LLC legislation in the Cook Islands includes some asset protection features that are likely to keep the Cook Islands popular among asset protection attorneys.
Nevis
Nevis was one of the first countries to follow the Cook Islands, duplicating an older version of the Cook Islands law and naming it the Nevis International Exempt Trust Ordinance, 1994. One distinguishing feature of the Nevis legislation is that a creditor must post a bond of ECB 25,000 (roughly USD 13,000) to lodge a complaint against a trust registered in Nevis.Very little case law exists in Nevis, which many attorneys interpret to mean that creditors are effectively deterred from bringing suit in Nevis. It has a small offshore banking industry, with St. Kitts-Nevis-Anguilla Bank and Bank of Nevis International as the only licensed offshore banks.
LLC legislation modeled after the Delaware LLC Act was passed in 1996. This has enabled Nevis to distinguish itself as a primary offshore jurisdiction for LLC formations, as opposed to other countries that are well known for IBC formations (British Virgin Islands) or trust formations (Cook Islands). A Nevis LLC is often used in conjunction with an asset protection trust because it gives the creator of the trust direct control over the assets if the creator is listed as the manager of the Nevis LLC. This gives the creator added security in that it keeps the assets one step removed from the trustee of the asset protection trust. Because the managers and members of a Nevis LLC are not public information, the creator of the trust is able to assume control over the assets without making disclosing his control on any public records.
Belize
BelizeBelize
Belize is a constitutional monarchy and the northernmost country in Central America. Belize has a diverse society, comprising many cultures and languages. Even though Kriol and Spanish are spoken among the population, Belize is the only country in Central America where English is the official...
, for example, offers immediate protection from court action initiated by creditors which challenges the settlor’s transfer of property into the trust. However, due to the paucity of credible offshore banks in Belize, many trusts established in Belize hold assets with a second trustee or third-party financial institution in another country.
Bahamas
The Bahamas have traditionally been associated with offshore planning. However, the Bahamas are probably more noteworthy for offshore banking and IBC formations than for asset protection trusts. The Bahamas do not recognize self-settled spendthrift trusts, unlike the Cook Islands, Nevis, or Belize. For this reason, the Bahamas are not regarded as an asset-protection trust jurisdiction.Channel Islands (Guernsey and Jersey)
The Channel Islands have captured the imagination of UK residents longing for offshore asset protection and safe havens to hide assets. However, modern case law indicates that creditors are routinely able to freeze trust assets in the Channel Islands. Furthermore, tax law initiatives in the UK have largely eliminated the tax advantages of placing assets in trust in the Channel Islands. While the Channel Islands enjoys a modern banking sector, most attorneys do not regard the Channel Islands as appropriate for asset protection planning.Switzerland and Liechtenstein
Switzerland and Liechtenstein are noteworthy for large banking sectors and sophisticated wealth management services. While both countries now recognize trusts (particularly trusts established under the laws of another jurisdiction, such as Nevis), there is as of yet no available case law indicating how the courts of those two countries will enforce offshore asset protection trust laws.Many attorneys establish asset protection trusts under the laws of another country and deposit the trust assets in Switzerland or Liechtenstein. One question raised by this approach is whether a creditor can seize assets in Switzerland or Liechtenstein without having to bring a claim in the trust-protective jurisdiction. Again, a lack of precedent suggests that this is an open issue in Switzerland and Liechtenstein.
Both countries are also known for offering asset protection annuities, with a six-month statute of limitations on fraudulent transfers into an annuity. Unfortunately for most Americans, these annuities cannot invest in US securities without punitive taxation due to the offshore status of the insurance carriers that offer these annuity products. Furthermore, many lawyers peddling these annuity products to their clients collect commissions from the insurance carriers. These reasons, among others, may help explain why annuities offered in these two countries are not particularly popular with U.S. persons. This does not mean that taxpayers of other jurisdictions may not significantly benefit from holding a Swiss or Liechtenstein annuity. Also, U.S. persons may benefit from holding an annuity issued by a carrier in an asset-protective jurisdiction (such as the Cook Islands), particularly if the carrier is an electing 953(d) carrier (a reference to a provision of US tax law).
Challenges
Whether such a trust is a spendthrift trustSpendthrift trust
A spendthrift trust is a trust that is created for the benefit of a person that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary...
on the U.S. model, a protective trust
Protective trust
The Protective Trust is a form of settlement found in England and Wales and several Commonwealth countries. It has marked similarities to asset-protection trusts found in several offshore jurisdictions and US Spendthrift trusts....
on the Commonwealth model or another form of discretionary trust, it is more likely to be subject to challenge under the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
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 (fraudulent conveyanceFraudulent conveyanceA fraudulent conveyance, or fraudulent transfer, is a civil cause of action. It arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees...
).
Offshore trust
Offshore trust
An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction.Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring assets on the trustees to manage for the benefit of a person or...
s 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. For this reason, a properly established asset protection trust should provide a clear separation between the settlor and those who exercise control over the trust assets.
US v. Grant
The most recent case to rule on the merits of a contempt order is US v. Grant. In 2005, a federal district court in Miami ordered a domestic protector of an offshore asset protection trust, under threat of contempt, to exercise her power to replace the foreign trustee with a domestic trustee chosen by the court. The ruling, U.S. v. Grant Case No. 00-08986-Civ-Jordan (D.C. So. Fla. 2005), threatened to draw into question the viability of an asset-protection trust if a domestic protector could be compelled to appoint a domestic trustee to marshal the assets and bring them within the purview of the domestic court proceedings.In May 2008, the U.S. government sought to hold the domestic protector in contempt of court for failing to secure the cooperation of the foreign trustee to resign and repatriate the trust assets. The U.S. District Court for the Southern District of Florida ruled against the government, finding that the domestic protector could not be held in contempt for failure to gain the cooperation of the offshore trustee. In denying the government's contempt motion, the judge observed:
"I understand that it has been more than two years since the repatriation order was issued and that the funds had not yet been repatriated. But this failure is not for a lack of effort. I am reluctant to fault Mrs. Grant for her trustees' denial of her requests to repatriate the funds." U.S. v. Grant, 2008 U.S. Dist. LEXIS 51332, 101 A.F. T.R.2d (RIA) 2676 (D.C. So. Fla. 2008).
For years, lawyers have vigorously debated the vulnerability of an asset protection trust with a domestic protector. The Grant case stands for the proposition that no vulnerability exists if the domestic protector complies with the court's orders. While a domestic protector may be required to make an effort to repatriate trust assets, failure to achieve repatriation should not entail any dire consequences to the trust or to the domestic protector. As long as a duress clause permits the foreign trustee to ignore the pleas of a domestic protector acting under threat of a contempt order, the selection of a domestic protector should not jeopardize the integrity of the offshore asset protection trust.
While most attorneys draft trust agreements to limit the domestic protector's powers to those of a negative nature (i.e., the domestic protector may veto trustee decisions, but a domestic protector cannot order a trustee to do anything), the ruling in Grant implies that even positive powers exercisable by a domestic protector may not jeopardize an offshore asset protection trust containing a duress clause. Whether this leads attorneys to be more cavalier in their trust drafting remains to be seen. At least we know that traditional offshore asset protection trust planning works as anticipated.
Taxation
There are rigorous US tax reporting requirements that apply to taxpayers who establish offshore trusts. While no additional tax is usually imposed, certain forms of asset protection trusts require full disclosure of all trust assets and activities on the U.S. contributor's tax returns. Confidentiality is usually not enjoyed under these arrangements.Most asset protection trusts established by U.S. settlors are considered "grantor trusts" under U.S. income tax law, meaning that all income of the trust is reportable on the grantor's (i.e., the settlor's) individual income tax return. Asset-protection trusts do not, in and of themselves, offer any tax advantages under U.S. income tax law.