The Trust: An Efficient Asset Protecion Tool?

In the last few years, trusts have been growing in popularity among business people, including as an asset protection mechanism. Since a trust is a patrimony by appropriation, neither the settlor nor the beneficiaries have any ownership rights in the property transferred, and therefore the property cannot, in theory, be seized by their creditors.

A tangible proof of the growing popularity of trusts? In the past year, Quebec courts have rendered two decisions involving trusts that may have been constituted for the purpose of asset protection (although other objectives may have been simultaneously achieved, including tax objectives).

In each of these cases, a creditor brought an action to obtain a declaration that certain transactions executed between his debtor and a trust may not be set up against him, in order to seize the property transferred to the trust as debt repayment.

In the case Empire, compagnie d'assurancevie c. Thibault¹, the Superior Court allowed the action, declared that several legal instruments could not be set up against the creditor, authorized the creditor to seize all known trust assets and ordered trustees not to compromise certain trust assets. It is worth mentioning that the settlor of the trust had been, at the time of the transactions, crippled by debt and subject to legal actions (existing and threatened). In its decision, the court observes the apparent fraudulent nature of the transactions and further observes that the debtor had no intention of repaying his debts.

In Levasseur c. 9095-9206 Québec inc.², the Court of Appeal declared the inoperability of only a few transactions. With respect to the operations that led to the creation of the trusts, the Court concluded that the creditor failed to establish on a balance of probabilities that such acts were committed in fraud of his rights nor that the defendant rendered himself insolvent or attempted to render himself insolvent. However, with regards to transactions that occurred four years after establishing these trusts, at a time when the parties were referred to arbitration by the Superior Court, the Court of Appeal accepted to declare that these transactions could not be set up against the creditor, after having noted that they jeopardized the chances of the creditor to ever be reimbursed. In addition, the validity of these trusts was analyzed by the Court, which upheld them. However, the Court ordered the trustees to report to the creditor twice a year on the use of trust property and to inform the creditor in writing 48 hours before making any payment in favour of the debtor. The money thus received by the debtor, as beneficiary of the trusts, may be seized by the creditor.

These two decisions illustrate the trust's limitations as an asset protection tool. They also demonstrate the importance of the facts and circumstances surrounding the establishment of a trust and the transfer of property in its favour. The debtor's intent and its financial situation at the time of the transactions will be scrutinized by the court. The trust will be maintained and the property transfer will be set up against the creditors of the assignor, if the court concludes that, at the time of the transfer, the assignor was not insolvent and that by this same transfer he did not render himself insolvent or attempted to render himself insolvent.

Footnotes

1 2011 QCCS 3556 (in appeal).

2 2012 QCCA 45.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.