To what extent are assets in offshore trusts sheltered from claims made under other jurisdictions' laws against settlors, beneficiaries, trustees or trust property? Many offshore jurisdictions have experienced challenges drafting effective and appropriate firewall legislation. Consequently, many jurisdictions have recently updated key aspects of their firewall legislation. In contrast, the concept of asset protection trusts and fraudulent transfer legislation may have received less attention recently. From the perspective of Bermuda, this article considers factors relevant to protecting trust property from creditors' claims and further examines how conflict of laws rules work and the competing policy considerations and practical realities that offshore legislatures weigh up when developing conflict of laws rules applicable to trusts.
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 an 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. The asset protection qualities of the trust may also be influenced by the conflict of laws rules under the governing law of the trust.
However, asset protection is rarely the sole reason why a person might wish to form a trust. Arguably, 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. Aside from trusts over Bermuda land, Bermuda law trusts established on or after 1 August 2009 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 may provide flexibility to adapt to unforeseen circumstances without having to, for example, dispose of the assets or apply to a court for the appointment of a guardian, receiver, administrator or executor of an individual or an individual's estate.
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 and gains 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.
Back to asset protection. The nature of the claims with which a trust settlor may be concerned when considering whether to form a trust may include (among others):
- breach of contract or negligence claims from persons with whom the settlor or beneficiaries have transacted business;
- forced heirship claims from the executors or administrators of the settlor or a beneficiary's estate, or from the settlor's spouse or children;
- family provision or inheritance claims brought by a spouse, former spouse, child or other dependent of the settlor or spouse;
- claims brought by a former spouse of the settlor or beneficiaries based on community property rules;
- divorce or separation proceedings from a former spouse of the settlor or a beneficiary; and
- claims brought by a bankruptcy receiver in connection with the winding up of an insolvent settlor's or beneficiary's estate.
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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.