Why
an have an Asset Protection
Trust?
Every
state has laws in place
preventing a person
from disposing of his
assets where there
is a real or substantial
risk of insolvency,
or where the intention
is to place the assets
beyond the reach of
creditors (which is
also known as fraudulent
conveyance). When a
person does such a
transfer for insufficient
consideration, subsequently
a creditor may apply
to the courts to set
aside the transfer
and have the assets
returned to the Settlor,
at which time they
become available for
the creditor.
How
does an Asset Protection
Trust work?
In
brief, the creation
and operation of an
Asset Protection Trust
is made possible by
enacting special legislation
in the foreign jurisdictions
where the trust is
resides. The legislation
provides that a transfer
of property to a special
trust in specific circumstances
cannot be set aside
by the creditors of
the Settlor. Generally,
the conveyance to the
Asset Protection Trust
is not prohibited where
the Settlor was not
rendered insolvent
as a result of the
transfer. Depending
upon the jurisdiction,
there may be specific
requirements for registering
the Asset Protection
Trust, the trustee
or the conveyance,
etc.
Where
are the jurisdictions
of Asset Protection
Trusts?
There
are a number of countries
which have enacted
asset protection legislation.
Among them are the
Bahamas, Belize, Cayman
Islands, Cook Islands,
Cyprus, Gibraltar,
Mauritius and Turks & Caicos Islands.
What
are the features of
an Asset Protection
Trust?
The
typical form of Asset
Protection Trust is
a discretionary trust
(with the Settlor as
one of the beneficiaries).
An Asset Protection
Trust often provides
for the accumulation
of income during the
term of the trust.
It is quite important
that the trust be irrevocable,
the assets are situated
offshore, and that
everyone who has control
of the assets is located
offshore. The Settlor
should not reserve
for himself the power
to distribute trust
capital or have the
power change the governing
law/trustees/location
of the Asset Protection
Trust.
What
are some of the risks
involved in an Asset
Protection Trust?
As
can be expected, U.S.
lawmakers and the IRS
do not like the idea
that people can avoid
payment to their creditors
by simply moving their
assets out of the U.S.
In order to prevent
this, legislation has
been enacted with the
intent to prevent "Insolvent" people from transferring their assets in a fraudulent manner, or with the intention
or effect of defeating
or delaying creditors.
It is safe to say that
anyone transferring,
or assisting in the
transfer of assets
to an Asset Protection
Trust when the Settlor
is insolvent, will
face the possibility
of both civil and criminal
charges. Accordingly,
caution must be exercised
if there is any question
of insolvency. It is
also recommended that
an Asset Protection
Trust be considered
where a domestic trust
would otherwise be
used as part of the
estate plan.
If
you would like more
information regarding
asset protection, trusts,
family limited partnerships
or the subject of this
article please call
or email our office.
