Offshore Asset Protection Trusts

TUTORIAL ON OFFSHORE ASSET PROTECTION TRUSTS

The Trust concept has evolved under English Common Law dating back to the 11th century. With modern legislation, the Trust concept has now become one of the most effective asset protection tools available today. The key elements of the offshore trust are:

THE SETTLOR

The Settlor is the person who creates the Trust by transferring or settling his or her assets into a Trust. He or she may or may not be named in the Trust, as may be desired.

THE TRUSTEE

The Trustee is the person or Trust Company who accepts the Trust assets in trust for the Beneficiaries. Legal title to the assets must be transferred to the Trustee, who will administer and manage the assets for the benefit of the Beneficiaries, until the Trust is terminated or the assets are distributed.

Trustees have a fiduciary duty to act in accordance with the Trust Deed and for the benefit of the Beneficiaries.

The Trust structure may also provide for the client to manage the Trust assets.

THE TRUST DEED

The Trust will normally be evidenced by a written document called a Trust Deed, Declaration of Trust, Trust Instrument or Settlement Deed. This document specifies the details of how the Trustees are to administer and manage the Trust assets and how they are to distribute and dispose of trust assets during the lifetime of the trust.

The assets of a Trust will typically comprise one or more of the following: money, real estate, company stock, intellectual property, cyberspace assets and any movable or immovable assets.

THE PROTECTOR

All trusts include specific exclusion clauses that would normally exclude any trustee from benefitting from the trust assets, other than their normal fee for performing such duties. It is however, also possible to appoint an individual who is known as the "protector". The protector's main function is to ensure that the trustee(s) administers and manages the trust assets in accordance with the trust deed and he is often vested with the power to appoint and remove trustees.

The protector would normally be a friend of the family, a lawyer, accountant or some other professional person that the family/settlor can further rely on, apart from the trustee. It should, however, be emphasized that this person should not normally be resident in the country where either the settlor or the beneficiaries reside.

Further protection can be achieved by appointing a protector not in the jurisdiction of the trustees and who has the power to change the proper law or situs of the trust in an emergency. Certain trust deeds require prior approval from the protector before the trustees may exercise major powers; such as the distribution of capital and this arrangement may act as a device to reduce pressure on trustees in their own jurisdiction.

Care must be taken in drafting a trust deed to ensure that the protector's role is primarily advisory or else he could be viewed as an agent of the settlor and his actions could render a trust invalid.

THE LETTER OF WISHES

The Letter of Wishes is a memorandum setting out the settlor's wishes concerning the way in which the trust should be administered and/or distributed. It may be handed to the trustee of a discretionary trust at the time a trust is made, or at any time thereafter. This Letter of Wishes can be replaced at any time to meet changing circumstances. It may also indicate the person or persons whose wishes should be considered after the death of the settlor. Although Letters of Wishes are not legally binding they will normally be followed by the trustees.

REVOCABLE VS IRREVOCABLE

An Asset Protection Trust will normally be irrevocable. This is because, if the Settlor can revoke the terms of the Trust, a creditor can simply obtain a court order requiring him to do so. Under those circumstances the assets of the Trust would then be available to the creditors.

DISCRETIONARY VS MANDATORY

If the Settlor is to be a beneficiary of the Trust, it would normally be a discretionary trust.

With a discretionary trust, the Trustee can cease distributions from the Trust to the Settlor in an emergency. Otherwise, distributions from the Trust to the Settlor could be seized by the creditors.

If the Settlor is not a beneficiary of the Trust, the Trust may be mandatory i.e. distributions are written into the Trust and must be followed by the Trustee.

SPENDTHRIFT CLAUSE

The Trust should have a Spendthrift Clause. This clause shields trust assets from the creditors of a beneficiary of the Trust, at least until such time as distributions are made to the beneficiary.

TIMING

Trusts can normally be established in 24 to 48 hours.

CONFIDENTIALITY

Assets are held in the Trustees' name. Therefore Settlors enjoy privacy regarding the nature of their investments and to whom they are providing benefits (beneficiaries). The Trust document is not a public document. It is totally private.

ESSENTIAL PROVISIONS OF FOREIGN ASSET PROTECTION TRUSTS

• The jurisdiction must of course be tax free.
• The law should specifically permit a settlor to create, and to be a beneficiary of, a spendthrift trust.
• The law should have statutorily renounced the common law provision by which a trust may be declared invalid if the settlor retains too many controls over the trust.
• The law should allow the Settlor to be a trust Protector.
• The law should have repealed the 1951 Statute of Elizabeth which rendered void ab initio any transfer found to be fraudulent as to present or future creditors. It should have replaced it with a clause allowing fraudulent conveyance to exist only in respect of a creditor whose obligation existed at the time of transfer and whose existence was known to the settlor at the time of transfer. The creditor must prove that the transfer was made "at an undervalue" and with intent to defraud that particular creditor, who was actually prejudiced by the transfer. If the creditor meets this burden of proof, the transfer will be avoided only as to the amount of the debt owed to the defrauded creditor. The statute of limitation for a challenge should be no more than two years from the date of transfer.
• The legislation should allow the trust to be moved to or from its original jurisdiction. It should also permit a retroactive application of the jurisdiction's trust laws.
• It should not be possible for the trust to be invalidated due to the bankruptcy of the Settlor.
• The law should specifically preserve any desired community property nature of the assets transferred to the trust.
• The jurisdiction chosen should not recognize a judgment obtained in a foreign court. Under this law, a judgment obtained in the United States cannot be enforced outside the US. A creditor would have to hire an attorney in the other jurisdiction and begin the court case all over again. Since most countries except the US, do not allow lawyers to work on a contingency basis (i.e. a percentage of assets collected), the creditor will have to pay his own legal fees and probably the trust's legal fees, if he is unsuccessful. Under this situation therefore, the creditor cannot have the usual "nothing to lose" attitude towards bringing a case. Of course, even if the creditor is successful, he may still fail to gain the assets, since they may have been legally moved by the Trustee in the meantime, to another jurisdiction, which requires starting a case all over again in that jurisdiction.

Maritime International Limited recommends the following jurisdictions for the formation of offshore foreign asset protection trusts:

• Belize
• Nevis
• New Zealand
• St. Vincent
• Western Samoa

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