asset-protection trust


  • With various reforms in England and Wales aimed at keeping litigation costs reasonable, it is high time for the lawmakers of the Channel Islands to follow suit and ensure
    that trustees (and their lawyers) are not given an open cheque book to spend trust funds in litigation without regard to the value of trust assets at their disposal or the interests of the true owners of those assets.

  • Fully compliant with anti money laundering laws,[10] sharing taxation information with an increasing number of countries, modern case law indicate that creditors, who have
    a rightful claim, are able to freeze trust assets in the Channel Islands.

  • While both countries now recognize trusts (particularly trusts established under the laws of another jurisdiction, such as Nevis), there is no available case law yet which
    indicates how the courts of those two countries will enforce offshore asset protection trust laws.

  • 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.

  • It may be that a trustee, or even former trustee, can take trust assets to satisfy their legal costs, or even remuneration, without regard to the value of the trust fund and
    at any time, including long after their removal as trustee.

  • The case presents the Royal Court with an opportunity to provide much-needed clarification for beneficiaries and the trust industry on the extent to which courts will go to
    protect the trust fund from exhaustion as a result of claims by trustees for their costs.

  • [12] Challenges 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
    (fraudulent conveyance).

  • History The Channel Islands are a popular jurisdiction for the establishment of trusts for investment purposes, given the tax friendly obligations on trust income and assets
    and a robust tax law which supports confidentiality in relation to trust administration.

  • The quality of the banking and investment services is reasonable for the uses of a Trustee of an asset protection trust, however, the quality of the judiciary is considered
    low, as the legal profession is generally closed to the entry of non-Bahamians, and it is therefore difficult bring the knowledge of a specialised trust lawyer to the jurisdiction when needed.

  • If such an approach was to find favour with the Royal Court, settlors and beneficiaries would be well advised to consider whether they ultimately have the protections they
    thought they did, and reforms directed towards the incurrence of trust related expenses and in particular controls in respect of litigation costs may well be needed.

  • It is believed that the Cook Islands now has more registered asset protection trusts than any other country, although in most jurisdictions a Trust is considered a private
    arrangement and it is not a requirement to register a 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.

  • 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.

  • South Dakota is the first and only state in the US 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.

  • If a trustee (or former trustee) incurs legal fees without regard to the overall expense to the trust, then it is quite likely that it will carry the majority of those costs
    itself as recovery would be limited.

  • The first general exception, which accounts for the majority of asset protection trusts, no longer applies in several jurisdictions.

  • [citation needed] These jurisdictions are also known as United States Asset Protection Trusts (USAPTs), from the point of view of the non-US settlors.

  • 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.

  • Tax law initiatives in the UK have largely eliminated the tax advantages of British citizens placing assets in trust in the Channel Islands, which in the early years had been
    a source of business.

  • [citation needed] However, due to the paucity of credible offshore banks[3] in Belize, many trusts established in Belize hold assets with a second trustee or third-party financial
    institution in another country.

  • The establishment of a trust structure in the Channel Islands is therefore generally thought of as a sound investment decision and those looking to do so expect a high degree
    of certainty in terms of the court’s approach to the law and disputes should they emerge.

  • However, some landmark decisions show that the Cook Islands Court intends to uphold the asset protection trust law.

  • 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.

  • This statute is extremely important to property asset protect trusts set up to benefit one’s family.

  • Many attorneys establish asset protection trusts under the laws of another country and deposit the trust assets in Switzerland or Liechtenstein.

  • However the number of licensed trust companies give us some indication of how the jurisdiction is viewed.

  • Cook Islands[edit] The Cook Islands claims to be the first country to have enacted an explicit asset protection law, implementing particular provisions in 1989 to its International
    Trusts Act.

  • [11] 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).

  • 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.

  • 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

  • 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.

  • 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.

  • Offshore trusts and other asset protection vehicles typically do not prevent action against the individual concerned in his or her home country.

  • 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 disclosing his control
    on any public records.

  • (i.e., there is no time period for the creditor to challenge the transfer)[8] 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.

  • At least we know that traditional offshore asset protection trust planning works as anticipated.

  • 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.

  • Orders under divorce and creditor protection laws can typically be made against that individual notwithstanding the alleged independence of such trustees.

  • 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 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 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.

  • 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”.

  • 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.

  • 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.

  • Regulation of Fiduciary companies and the related banking and investment services offered in the Channel Islands is also considered good to excellent.

  • 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.

  • 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.

  • Investec are arguing for an interpretation which would generously favour trustees and even go so far as allowing them to leave it to their lawyers to dictate and control legal
    spend, which for a regulated entity is nothing less than extraordinary.

  • 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).

  • [7] As the Cayman Islands are a British Overseas Dependent Territory, the quality of the judiciary is considered excellent, with the islands able to draw on the services of
    British lawyers and solicitors when contentious cases arise and expert lawyers with appropriate experience are required.

  • [2] U.S. jurisdictions South Dakota[edit] 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.

  • As most Cayman trusts are therefore private arrangements, it is hard to give exact figures for the popularity of AP Trusts governed by Cayman law.

  • Another drawcard of the Channel Islands is that it has a reputation as a credible trusts jurisdiction as a result of the courts of Guernsey and Jersey hearing and deciding
    on numerous trusts issues facing trusts practitioners throughout the world.

  • Consequently, the common goal of asset protection trusts is to limit the interests of beneficiaries in such a way so as to preclude creditors from collecting against trust

  • This gives the creator added security in that it keeps the assets one step removed from the trustee of the asset protection trust.

  • The trust at the centre of a current dispute on this particular issue is a Jersey law trust known as the TDT.

  • Both countries are also known for offering asset protection annuities, with a six-month statute of limitations on fraudulent transfers into an annuity.

  • In England and Wales Cost-Capping Orders are available to parties in litigation involving trusts and courts regularly encourage or order litigants to engage in alternative
    dispute resolution.

  • 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.

  • Belize[edit] Belize, offers immediate protection from court action initiated by creditors which challenges the settlor’s transfer of property into the trust.

  • Alhamrani allows a trustee (and former trustee) to take their costs from trust assets unless they can be shown to be “unreasonably incurred”.


Works Cited

[‘1. Veit, Jeremy M. “Self-Settled Spendthrift Trusts and the Alaska Trust Act: Has Alaska Moved Offshore?”. Alaska Law Review. 16 (2): 269.
2. ^ Jump up to:a b Alexander A. Bove, Jr. “The United States As An Offshore Asset Protection Trust Jurisdiction
– The World’s Best Kept Secret” (PDF). Trusts & Trustees, Vol. 14 Issue 1 (Oxford Journals, 2008). Archived from the original (PDF) on July 8, 2011. Retrieved October 8, 2010.
3. ^ “FYIonBelize”. FYIonBelize. Retrieved 2020-09-05.
4. ^ Cayman
Islands Fraudulent Dispositions Law 1989
5. ^ STEP Diploma in International Trust Management Course Notes Module 11
6. ^ Cayman Trusts Law (2009 Revision – Part VI – Section 74(1))
7. ^ CIMA website:
Archived 2012-11-24 at the Wayback Machine
8. ^ Jump up to:a b Howard Rosen; Patricia Donlevy-Rosen. “Review of Offshore Jurisdictions: Cook Islands”. The Asset Protection News. Archived from the original on 2014-02-03. Retrieved 2014-01-29.
9. ^
Jump up to:a b Howard Rosen; Patricia Donlevy-Rosen. “Titling Assets: Pitfalls to be Avoided – Part I”.
10. ^ “The Anti-Money Laundering Regime: A Jersey Overview” (PDF). Bedell Group. Archived from the original (PDF) on 2015-12-08.
11. ^ A reference
to: How Asset protection with Swiss/Liechtenstein annuity works
12. ^ See Section 953(d) of the United States Internal Revenue Code of 1986, as amended.
13. ^ Howard Rosen; Patricia Donlevy-Rosen. “The Importance of Proper APT Design & Counsel”.
The Asset Protection News. Archived from the original on 2013-05-22. Retrieved 2013-02-05.
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