Insight

Choosing the right jurisdiction for an asset protection trust

Choosing the right jurisdiction for an asset protection trust

There can be no doubt that we are living in a time of heightened global political and legislative uncertainty. From the continuing conflict in Syria to broader tensions in the Middle East, from persistent Brexit ambiguity to Trump’s trade war with China – events playing out on the global stage are far-reaching and the speed of change can be incredibly quick.

It is in times like these that protection of assets assumes particular importance, and asset protection trusts can offer a useful safety net. For example, in the unfortunate event that somebody is forced to flee their home country, having assets held in trust can provide certainty for the beneficiaries that the assets will remain available in their new home without having to go through time-consuming and complex expatriation of assets. Similarly, any assets in trust may be protected from punitive financial provisions, such as the imposition of unpredicted and sometimes arbitrary wealth taxes.

But it’s not just the ultra-wealthy who stand to benefit from having their assets held in trust. Individuals involved in highly litigious or high-risk occupations or pastimes will often consider safeguarding some or all of their family wealth in a trust so that a future claim against them personally cannot damage their family’s financial wellbeing.

Whatever the precise circumstances of the individual, when setting up a trust for asset protection purposes there are some key considerations to work through in order to choose the best jurisdiction to meet the settlor’s needs.

The legal significance of jurisdictional selection

Assuming a trust is properly constituted, the most common form of attack by a creditor is to argue that assets were conveyed into the trust fraudulently; in other words, that the trust exists only because the settlor was aware of a claim at the time and was attempting to place assets out of reach.

Given trust law’s origin in English law, most creditor challenges will be under the provisions of the Statute of 13 Elizabeth (or a derivation thereof). Though repealed in England in 1925, this Act of Parliament forms the basis of fraudulent assignment legislation in many countries where trusts will typically be established.

Three exceptions to this are the Isle of Man, Jersey and Guernsey. Since none of these islands have ever been British colonies, their laws have been developed independently and, although heavily influenced by English law, certain provisions, such as the Statute of 13 Elizabeth, were not adopted. With the exception of the Isle of Man’s Fraudulent Assignments Act of 1736, which has limited application, arguments of fraudulent conveyance in the Crown Dependencies will typically be judged against leading case law on the subject.

In contrast, since many of the British territories, and indeed other former colonies, have incorporated a form of the Statute of 13 Elizabeth in their local legislation, it has been necessary to either repeal this law or introduce specific asset protection laws to provide certainty.

Some countries, such as the Cook Islands and Belize, have legislated with a view to promoting themselves as strong asset protection locations, while others have introduced asset protection legislation that purports to provide certainty to transferors after a reasonable statute of limitations period (typically two to six years).

Settlors who require certainty about the effectiveness of their asset protection trusts may be best served by the robust approach to creditor challenges offered by case law and the practice of the courts. Case law does not rely on newly introduced legislation that is intended to override an existing provision (and hence produces an inherent legal conflict), but instead provides clarity as to the conditions that must prevail for a fraudulent assignment to be deemed to have taken place.

Other considerations

Of course, asset protection in terms of fraudulent conveyance law is only one factor in the choice of trust location, though it is arguably the most important. Among the other factors that should be considered by a potential settlor seeking protection are:

  • The location of the trustees, the settlor and the assets themselves – There are clear benefits to a physical separation of the settlor, assets and trustees, in order to minimise the influence a court might have in enforcing a creditor’s claim.
  • Rule of law – It is important to choose a jurisdiction with a proven record of the strength, longevity and certainty of its laws, backed by a robust regulatory regime.
  • Recognition of foreign laws or judgements – Effective asset protection can be undermined if a creditor is able to obtain a judgment in another jurisdiction that is automatically enforced where the trust is located. Though the Crown Dependencies have enacted Reciprocal Enforcement Provisions, these are limited to certain countries, thus reducing the risk of a creditor seeking to enforce a judgment from a country where a court judgment may not be subject to the same standards of proof.
  • Reservations of powers – Although trustees cannot be required to take specific actions by courts in another jurisdiction, it is important not to undermine this protection by granting significant powers to a settlor or protector who remains under that court’s jurisdiction.
  • Perception – Since the trust has been established for legitimate asset protection reasons it is important not to undermine this by choosing a jurisdiction known for aggressive asset protection legislation, as this might inadvertently imply a motive of simply wishing to defeat creditors.

Ultimately, no jurisdiction can offer complete certainty that a settlor’s assets are safe; the choice of trust location comes down to personal preference. It will depend on many factors, as outlined above. But for those seeking established case law and a well-tested legal defence to future creditor claims, the Crown Dependencies of the Isle of Man, Jersey and Guernsey will remain jurisdictions of choice.