What is an asset protection trust?

A trust is not a legal person. An express trust is a fiduciary relationship whereby a person, the settlor, transfers property a trustee to hold and apply for the benefit of one or more persons or purposes in accordance with the trust's terms.

There is no legal definition of asset protection trust under the law of Bermuda or in most other jurisdictions. An asset protection trust may be described as an express trust with specific terms that aim to protect the trust property from claims brought against the trust's settlor or beneficiaries. However, asset protection is rarely the sole reason why a person might or should wish to form a trust. The overriding reason why trusts remain attractive to private clients is the flexibility that they provide for long term succession planning.

Most jurisdictions permit trusts to last for many years. Under Bermuda law, aside from trusts over Bermuda land, trusts can have an indefinite duration if the trust instrument permits it. As people are living longer, problems increasingly arise when individuals lose mental capacity and are, for example, unable to exercise or properly exercise voting or other rights in relation to their assets, which may include controlling shareholdings in the family business. Serious delays may occur in circumstances where an individual's vote is required before the business can enter into an important transaction. Trusts that provide trustees with discretionary dispositive and management powers can facilitate continuity when transitioning from one generation to the next. Trusts can provide flexibility to adapt to unforeseen circumstances without having to: dispose of the assets; apply to a court for the appointment of a guardian, receiver, administrator or executor of an individual or an individual's estate, as the case maybe. Trusts can also facilitate efficient tax planning for example, persons whose family members may be moving from one jurisdiction to another might wish to ensure they do not unwittingly expose existing capital and future income on such capital to taxation in the jurisdiction where they intend to become resident. However, on occasions, depending on the settlor's tax residency and other circumstances, forming a trust may be unattractive for tax purposes.

Article first published in the Trusts & Wealth Management Journal September 2016

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.