This is an especially complex subject and, as the title implies, this post will merely serve as an introduction. I might go more in-depth in future posts.
Asset protection is a term thrown around quite lightly in the financial services industry. Set up an LLC here, establish a trust there, and let’s not forget about a foundation. Great, now your assets are protected.
Let’s start by analysing the two constituents separately.
An asset can be anything that is owned by someone – usually something which has a value and can be converted into cash.
It is most commonly referred to money or financial instruments such as equity or contractual right to something.
However, an asset can also be real estate, vehicles, art pieces, musical instruments, collectibles, precious metals, and so on and so forth.
Protection here quite simply refers to the limitation of risk of seizure or damager to the aforementioned assets.
Actions may occur – either a hostile action or a repercussion of the asset owner’s own actions – which can lead to a seizure order being issued by a court. Loss of funds or other assets as a consequence of unpaid debt, medical malpractice, divorce,
Ethically defensible or not – these are risks people often seek to mitigate.
A settlor is someone who establishes a trust. It can be multiple people or even organizations, but for this context it is usually a single person. This person is often the same as the debtor in a dispute, which means someone who owes something (usually money) to someone else, who is known as the creditor.
Then we have what’s called a trustee, which is a person, group of people, company, foundation, another trust, or other which owns the trust and is responsible for management of the funds. Trustees are usually licensed and regulated fiduciaries with offices, residences, and even citizenship of tax havens.
Trusts also have what’s called one or more beneficiaries. This again is a person, group of people, company, foundation, another trust, or other which can or will benefit from the trust. For example, parents may set up a trust for their children and decree that funds be paid out when certain conditions are met (such as the children each turning 18 or upon the birth of the first grandchild).
Trusts can be established in a way where the beneficiary is the same as the settlor. These are called self-settled trusts. In many cases, they do not enjoy the same asset protection benefits as trusts where the beneficiary is a third party.
Protect Your Assets
So how do you protect your assets?
In essence, what needs to be done is create a separation between the assets and the event whose consequence can be a seizure of the assets.
A typical example would be an expected divorce. In due time before the divorce (see Fraudulent Conveyance below), one spouse may surrender his or her wealth into an irrevocable trust. Structured correctly, this would create a situation where the spouse no longer owns the funds and the other spouse is – or rather should in theory be – unable to get their hands on the money.
Why? Because what’s in the trust belongs to the trustee. The trustee should be someone who is neither a resident nor a national of the jurisdiction(s) where the dispute is taking place. A court order has no bearing on the trustee.
The debtor has no or very little funds to their name, leaving the creditor with a fraction of the wealth the debtor previously held.
Also called fraudulent transfer, this is the act of placing assets in a trust after the incident has occurred, proceeding has begin, or after a time when the act could be reasonably foreseen.
Laws vary between jurisdiction but it is essentially comes down to the fact that it is illegal to intentionally avoid financial liability for known or reasonably-knowable repercussions of actions taken or actions intended to be taken.
A certain period of time must pass between a transfer (handing over of assets to a trustee, for example) takes place and the time when the assets are under attack.
In most jurisdiction, this time period is between four and ten years. This means that a transfer to a trust can be considered fraudulent up to ten years after being made. What sets some popular trust jurisdictions aside from the rest is their low fraudulent transfer time period. Cook Islands and Saint Kitts and Nevis for example have set theirs to two years.
Duress and Countermeasures
So why can’t a court just compel a settlor to withdraw funds from the trust?
They can but it does nothing.
Suppose a creditor has a court order it can use to satisfy judgement on a debtor. The debtor claims he is unable to pay because all of his former wealth now belongs to a trustee in a strong asset protection jurisdiction.
The creditor can go back to the court and get an order to request the debtor to ask the trustee to release funds, either back to the debtor or to the beneficiary. The trustee will reject this request because they cannot return the funds in an irrevocable trust and it cannot withdraw funds to the beneficiaries since the instructions from the settlor are given under duress.The funds are stuck in a deadlock.
Creditors are left with essentially two countermeasures: they can either attempt to get a court order from the trustee’s jurisdiction or to drag the process out ad infinitum.
Getting a court order is generally considered a hopeless process, especially in the strictest jurisdictions. In Saint Kitts and Nevis, a creditor would even have to purchase a government bond of 25,000 ECB (circa 8,200 EUR / 9,200 USD) before a court will even hear the case.
A creditor with ample funding can however exploit the duress clause and repeatedly attack the trust in such a way that the settlor is unable to give the trustee any instructions at all. This becomes very difficult to continue and if the settlor is in no immediate need of the funds, the continued barrages do no harm.
Theory vs. Reality
The only thing we can say for certain when it comes to asset protection is that it is largely untested. There is very little case law to go on and those which are available aren’t necessarily applicable to other situations.
Most jurisdictions have no experience dealing with these matters.
There is a lot of work that goes into proper asset protection and every detail matters. The jurisdiction of residence of the settlor, trustee, and beneficiaries can all play a role, as can location of bank account and the manner by which the funds are used while in the trust (invested, held in a deposit, spent). In essence, any minute little detail can end up having a dramatic impact on how a court views a trust.
However, it is in general probably possible to protect assets using an asset protection trust or similar structure, but only if it is set up correctly to the settlor’s particular situation to mitigate as many risks as possible.
It all sounds great – so should you drop a few thousand and set up an asset protection trust?
What it comes down to is whether the risks are worth more than the cost establishing and maintaining the trust.
Careful planning is needed. Be wary of service providers that are offering simple packages or easy solutions, because there is nothing easy or simple about asset protection.