7 Global Jurisdictions Famous For Asset Protection
An asset protection trust is one which insulates its assets from the claims of creditors, taxation, divorce and bankruptcy against any of its beneficiaries by providing for funds to be held on a discretionary basis. A self-settled trust is one in which the trust’s settlor is also its beneficiary (i.e. a trust you establish for your own benefit).
Most self-settled trusts come with a spendthrift clause so as to prevent a trust beneficiary from alienating their interest in favor of a creditor and thus use it as a means of asset protection. However, there are three general exceptions wherein this protection is not afforded, the first refers to self-settled trusts. The first exception is no longer applicable in a number of global jurisdictions, explored below, as well as some domestically like Local Digital Business.
Basics of Asset Protection
Asset protection trusts are able to perform their purpose by separating a beneficiary’s enjoyment of the trust’s assets from their legal ownership. By doing so, a trust’s beneficiaries own the benefit of equitable interests in these assets, but not of a legal title to them.
Therefore, these kinds of trusts are able to safeguard assets without in a law-abiding manner and without evading tax. Claims for creditors will be rebuffed as can pursue amounts equal to the beneficiary’s interest in such a trust. Therefore, by limiting the interests of beneficiaries by not granting them legal titles, creditors are precluded from collecting against trust assets.
Offshore Jurisdiction Asset Protection
Bahamas
As a result of the Fraudulent Disposition Act of 1991, asset protection trusts in the Bahamas were strengthened greatly. It enabled a settlor to render all of a trust’s assets inaccessible to any court proceedings actioned over two years after the trust was created. The Bahamas would not recognise such foreign court judgments.
Belize
The foreign asset protection of Belize extends refuge to any assets of an offshore company that is registered in Belize. Such assets of an offshore company in Belize cannot be attacked by third parties or foreign entities.
Identical protection extends to assets contained in Belize offshore trusts. National law guarantees safeguards of asset protection.
Cayman Islands
In the Cayman Islands, the creditor’s responsible for bringing an action in the Cayman Islands courts (i.e. not in their domestic courts) as well as satisfying the burden of proof. The bar for the latter is set high for potential claimants, who must be able to demonstrate a Settlor’s intention to defraud.
Additionally, the claimant must be able to illustrate why they are an “eligible creditor” – meaning an obligation was to them by the transferor at the date of the transfer. Action must also be able to be sought in the Cayman Islands, which in itself is incredibly expensive.
Cook Islands
The Cook Islands’s enactment of an explicit asset protection law in its 1989 ‘International Trusts Act’ are this jurisdiction’s claim to being the first to do so. Many of these changes have been instrumental in shaping the authority on asset protection in several other jurisdictions, including some states in the US.
The paramount change is the ability of a trust’s settlor to be named as a spendthrift beneficiary for the sake of asset protection. Cook Islands trust laws shortened the statute of limitations on claims for fraudulent transfer; it was reduced to two years here, while in most US the statute of limitation is four years. In special circumstances the limitation period may be able to shrink to as short as one year.
Nevis
The lack of case law in Nevis is interpreted by many attorneys to mean that creditors are dissuaded from taking legal action here. It has a small offshore banking industry, with St. Kitts-Nevis-Anguilla Bank and Bank of Nevis International as the only licensed offshore banks.
By adopting its LLC legislation after the Delaware LLC Act 1996, Nevis has been able to distinguish itself as a specialist offshore location for creating LLCs. LLCs formed in this country often go hand in hand with an asset protection trust since the creator of the trust is given direct control over its assets assuming they’re listed as the manager of the Nevis LLC.
This is because this pairing grants the creator additional security to the extent that the assets are kept even further removed from the trustee. Furthermore, since it is not public information who the managers and members of a Nevis LLC are, the trust’s creator can manage the assets without disclosing this in any way on public records.
Channel Islands
Long considered to be the first jurisdiction to develop an offshore finance industry, the Channel Islands are also deemed to be one of the most useful jurisdictions to protect oneself with.
Unfortunately, UK tax law enterprises have, for the most part, removed any tax advantages available for British citizens to benefit from by placing assets in a Channel Islands trust.
Switzerland & Lichtenstein
Both Switzerland and Liechtenstein are renowned for the great size of their financial sectors and highly tailored wealth management services. Since both countries now recognize trusts (particularly trusts established under the laws of another jurisdiction, such as Nevis), many attorneys often deposit the trust assets of a foreign asset protection trust in Switzerland or Liechtenstein.
However, due to an absence of case law to designate how these two countries’ courts will enforce offshore asset protection trust laws, there is uncertainty surrounding this approach. For example, a lack of precedent has left it a contentious issue whether a creditor can seize assets in these countries without first bringing a claim in the jurisdiction providing protection for the trust’s assets.
Domestic Asset Protection Trust
Since Alaska became the first US state to enable self-settled trusts to protect assets in 1997, many others soon followed. These DAPTs (Domestic Asset Protection Trusts) must meet several requirements by law.
Firstly, it must not be able to be revoked and spendthrift; a minimum of one resident trustee needs to be appointed; some of the trust’s administration must take place in the respective state; and the settlor cannot act as a trustee. For more information on the Wyoming self-settled trust, please refer to the linked resource for a comprehensive guide.
Final Thoughts
To summarize, there are a number of jurisdictions – both foreign and domestic – that enable the settlor to use trusts as a means for asset protection. This can be done by forming a self-settled trust (i.e. one in which the person who creates the trust is also its beneficiary) that protects its assets with a spendthrift clause.
The stipulated jurisdictions above permit the creation of such trusts and provide protection of them through a variety of means; in the Cook Islands this is done by reducing the statute of limitations on claims for fraudulent transfers to half the amount of most US states.
