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Asset Protection Review

by Investors Offshore Editorial, July 2012
20 July, 2012


A financial management strategy in which asset protection is a key goal will be of particular interest to those working in professions where there is a high risk of litigation, for example doctors, lawyers, business owners, and financial planners, to name but a few. 

There are increasing numbers of frivolous lawsuits being brought (particularly in the US), in which the defendant is being targeted not necessarily because of his culpability in the case, but because of his ability to pay. Individuals in the above high risk groups with savings or significant assets could well fall in this 'deep pocket' category, and risk losing everything if there are not proper protection measures in place.

Although professionals of many kinds are obliged to have liability insurance, this is becoming more and more expensive due to the increase in litigation and the rising level of damage awards - and in any case, may not cover the full size of an award, particularly in the USA. Therefore, it is increasingly important to consider putting in place some additional asset protection measures.

Asset protection strategies basically work by making the assets of an individual unavailable, or difficult to recover, (and hence potentially more unattractive) in the event of legal proceedings being taken against them by employees, clients, patients, litigious family members or other creditors.

Protection of assets can take a number of forms, and while there are many domestic alternatives, including living trusts, limited liability partnerships and companies, and family limited partnerships, offshore vehicles are usually more effective for this purpose.

Offshore bank accounts can provide enhanced privacy and confidentiality, and they are usually an integral part of an asset protection strategy.

Offshore Trusts

The trust is the lynch-pin of offshore asset protection. In a trust arrangement, the settlor (the person who transfers assets to the trust) legally gives over control of his assets to a trustee (or trustees), who manages and controls them for the benefit of a beneficiary or beneficiaries (of which the settlor can be one). Although the settlor will usually provide a letter of wishes, detailing how he would like the money to be managed, and distributed, the trustee/s have legal control over the assets.

Very rich people had begun to use offshore trusts in the first half of the century, but at least as much because of the additional asset protection that they offered, simply by being in a different jurisdiction, as because they were tax efficient, and they remain popular today for this purpose.

The administrative overhead and other complications of dealing with an offshore location were initially very great, so that at first only conveniently close-by jurisdictions like Jersey (Channel Isles) for the Brits and the Bahamas (for Americans) developed as 'offshore' jurisdictions (the first trusts legislation in the Bahamas dates from 1893). The great expansion of trusts, both in terms of number of jurisdictions and volume of business, came later when telecommunications, air transport and the end of capital controls opened up the world and gave freedom to investors and the owners of capital.

In the 1980s and 1990s, tax authorities in high-tax countries gradually began to attack the offshore trust, either through specific legislation or through general anti-avoidance provisions, and as this process whittled away at the tax advantages of offshore trusts, asset protection began to take over as the predominant motive for offshore settlements.

Initially, rich 'continentals' used different techniques to protect their assets, but in time they grew to like the friendly Anglo-Saxon trust, and in the latter part of the 20th century as trust law began to be implanted into the foreign soil of one 'Code' jurisdiction after another, the common-law jurisdictions needed to follow and passed laws which specifically excluded forced heirship and creditor protection provisions.

Offshore trusts and companies can be used separately or together for asset protection purposes (usually in conjunction with an offshore bank account).

Several offshore jurisdictions have had trust laws in place for many decades, and large and sophisticated communities of professional advisers on trust matters have developed in most of them. Some of the major offshore trust jurisdictions are briefly summarized below.

Cook Islands

Cook Island trusts are known locally as International Trusts and are governed by the provisions of the International Trusts Act 1984 (the Act), which has been substantially amended in 1989, 1991 1994, 1996 and 2004.

The Act provides for the licensing of trustee and trust management companies. All International Trusts must have a resident licensed trustee with management powers (unless they come within the custodian trustee exception cited below). Normally this means that the International Trust is required to use one of the registered trust companies which operate out of the Islands. To obtain the protection of the Islands' laws the trust must be registered by the licensed trustee company within 45 days of its creation and they must certify that the trust is an International Trust under the Act.

The non-resident settlor may appoint a licensed and resident Cook Islands trustee as a custodian trustee and is then free to appoint managing trustees within his own jurisdiction. The Act imposes strict confidentiality rules on trustees and the staff of licensed trustee companies, which can only be breached in well-defined circumstances.

The Trustee Companies (Due Diligence) Regulations 1996 require the officers and employees of a registered trust company to take reasonable precautions to ensure that an International Trust is not being used to shelter assets derived from drug smuggling, money laundering or other serious crime.

The Offshore Criminal Provisions Act 1996 provides that where an officer or employee of a registered trust company has cause to suspect that an International Trust is being used to shelter the proceeds of drug trafficking or that a person related to or involved with the entity has been convicted of serious criminal activity, that matter is to be referred to the appropriate Government regulatory body. Furthermore the registered trust company is to provide such reasonable assistance, documentation and other information as may be required by the Government regulatory body under the law.

Bahamas

Trust Management has been a major activity in the Bahamas for 50 years or more, and in the last 15 years the Bahamas have extended and adapted their trust laws to accommodate an expanding market for trust services, which is not necessarily interested so much just in tax avoidance, but also in asset protection and the efficient management of wealth in a more general sense.

Individuals can provide trust services without registration, but companies offering trust services must be licensed under the Banks and Trust Companies Act 1965. Foreign or Bahamian companies may obtain licenses. These are issued by the Central Bank of the Bahamas, following a stringent application procedure.

A licensed trust company may be 'public' or 'restricted'. 'Restricted' companies require less capital, but are more strictly controlled.

Bahamian trusts (other than those holding Bahamian property) do not have to be registered, and the 1998 Trustee Act disapplies Exchange Control Regulations to non-resident settlors, donors, beneficiaries and trustees - therefore it is no longer necessary for trusts to be registered with the Central Bank as non-resident.

The 1998 Act provides for the appointment of a 'protector of trust', effectively a supervisor of the trustee(s), and also managing and custodian trustees.

Comprehensive new Private Trust Companies (PTC) legislation passed both houses of parliament in the Bahamas in December 2006. Under the legislation, a Bahamian PTC, does not require regulatory approval. The PTC need only arrange its affairs with a regulated Bahamian service provider or Registered Representative.

Under the legislation this class of trust is defined by reference to the Designated Person(s). The Designated Person(s) is an individual(s) who is identified at the establishment of the PTC and with whom all other settlors of trusts, for whom the PTC acts as trustee, must be related. With the requirement that the Designated Persons must be related, and that all other settlors of trusts, for whom the PTC acts as trustee, must be related, the PTC can act as Trustee for an unlimited number of trusts and can benefit anyone (subject to due diligence requirements) from the assets of the trusts.

British Virgin Islands

Trust Management has been a major activity in the British Virgin Islands for 30 years or more. Trusts in the BVI have a basis in common law, and are formed under the Trustee Ordinance 1961.

 The Trustee (Amendment) Act 1993 considerably modernised and updated the legislation, allowing for purpose trusts among other things. The new legislation, together with the highly flexible BVI International Business Company, has opened up wider markets for the BVI trust to include asset protection and wealth management in a more general sense.

Companies offering trust services must be licensed under the Banks and Trust Companies Act 1990, and supervised by the Banking and Fiduciary Division of the Financial Services Commission. 

The Amendment Act introduced a fixed perpetuity period not exceeding 100 years, and has modern 'wait-and-see' provisions to deal with interests that might vest outside the perpetuity period.

Cayman Islands

Trust Management has been a major activity in the Cayman Islands for 30 years or more, and trust assets in Cayman now equal or exceed banking assets. 

Individuals can provide trust services in the Cayman Islands without registration, but companies offering trust services must be licensed under the Banks and Trust Companies Law (2009 Revision) (formerly the Banks and Trust Companies Law 1995, as amended in 2001 and 2003).

Foreign or Cayman-resident companies may obtain licenses. These are issued by the Governor, after the Monetary Authority has accepted an application giving comprehensive information about the applicant.

A licensed trust company may be 'restricted' or 'unrestricted'. 'Restricted' companies require less capital, but are more strictly controlled. 

Private trustee companies have recently become popular. In this arrangement, the trust itself remains uncluttered by control arrangements, which are exercised by the private trustee company, which in turn can be administered by a licensed trust company. This form is particularly suited to the larger type of family trusts with multiple beneficiaries and objects.

Gibraltar

Trust management, particularly for wealthy UK individuals, has been a traditional business for Gibraltar. Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but trust work continues to be significant.

The basic law of trusts is contained in the Gibraltar Trustee Act, which is virtually a copy of English trust legislation. Gibraltarian legislation affecting trusts also includes the Perpetuities and Accumulations Ordinance, the Trustee Investments Ordinance, the Bankruptcy Ordinance and the Trusts (Recognition) Ordinance.

Under the Bankruptcy Ordinance there is statutory protection against creditors for asset protection trusts, providing the settlor is an individual, and was not insolvent at the time of the disposition, nor became so as a result of it.

Trust documents are in English, and there are no requirements for registration except that Asset Protection Trusts must be registered with the Registrar of Dispositions. The normal perpetuity period of a Gibraltar trust is 100 years. There are no restrictions on the accumulation of income during the perpetuity period.

Jersey

Trust management, particularly for wealthy UK individuals, was Jersey's traditional business. Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but Jersey's trust business has continued to grow based on a more international clientele.

Total trust assets looked after on the island exceed GBP100bn, excluding Collective Investment Funds.

Jersey has an extremely well-developed legal and financial infrastructure for trust management. With such a large established base of trusts, and a growing reliance on corporate work, the volume of trust litigation is becoming significant.

Jersey trusts are governed by The Trust (Jersey) Law 1984, which codified trust law largely along the lines of English-based common law, and the Trusts (Amendment) (Jersey) Law 1989. 'Purpose' trusts were recognized in 1996.

The Trusts (Jersey) Amendment No. 4 Law 2006 introduced settlor-reserved powers to provide greater statutory certainty regarding the level of control and influence a settlor may exercise over the ongoing administration of assets placed into trust. 

There is no registration requirement for trusts and no fees are payable. The trustees of a non-resident trust (ie one whose beneficiaries are non-resident) are not required to submit returns or provide accounts of the trust to the Comptroller of income tax. Trust accounts must be maintained but audit is not required. Trust documents are normally in English.

Jersey has not implemented legislation for Asset Protection Trusts. However, Jersey trust law specifically excludes foreign inheritance laws and provides for non-recognition of foreign judgements.

Foundations

Foundations have long existed in civil law countries where the concept of an Anglo-Saxon trust is unfamiliar. Several, mainly offshore, common law jurisdictions have accommodated foundations laws into their own suites of offshore legislation in order to asset protection and wealth management business from a rapidly increasing population of wealthy individuals and families in emerging economies such as China, Russia, and in Latin America.

The objective of a foundation is much the same as that of a trust. However, unlike a common law trust, a foundation is a legal entity more akin to a company and as such, it is usually entered onto the Companies registry in the jurisdiction concerned. Foundations are formed by a founder who provides the initial assets of the foundation, otherwise known as the endowment. This highlights another area where foundations differ from trusts in that the assets are held for the purposes set out in the foundation’s constitutive documents and are administered according to contractual rather than fiduciary principles.

Whereas trust assets are held by a trustee, a foundation has a council which acts much like a company board and which is responsible for fulfilling the purpose of the foundation, although there are no shareholders. Beneficiaries have contractual rights to enforce the operation of the foundation in accordance with its constitutive document – rather than proprietorial rights in its assets.

As mentioned above, foundations are no longer seen just in civil law countries, and a number of common law jurisdictions have developed, or are in the process of developing, their own foundation laws. Notable examples are summarized below.

The Bahamas

Foundations were introduced by the Foundations Act 2004 and accompanying regulations. Under this law, there are no perpetuity period rules applicable to Bahamian foundations, which immediately provides for continual unending succession if it is desired by the founder. A Bahamian foundation is not subject to forced heirship laws of a foreign jurisdiction.

A Bahamian foundation is a distinct legal entity which is convenient for ‘proper law’ questions. Assets placed within the foundation are owned solely by it, and a change in a Bahamian foundation’s governing body does not change the legal ownership of the foundation’s assets. There is no statutory requirement for an external audit unless the foundation’s charter so provides.

A foundation established in another country may redomicile in the Bahamas; and a Bahamian foundation may redomicile into another country, provided such a move is permitted in that country.

Jersey

In June 2009, Jersey's Privy Council approved an order allowing Foundations to be set up in Jersey - the first of the Crown Dependencies to bring in a genuine foundation product. As a result, the Foundations (Jersey) Law 2009, entered into force on July 17, 2009.

The regulations permit foundations to migrate in and out of Jersey. They also provide for existing Jersey companies to convert to foundations.

In particular, the regulations of a foundation must set out a procedure that ensures that a qualified person is appointed to be the qualified member of its council as soon as reasonably practicable if its qualified member dies, retires, or otherwise ceases to act or to be able to act.

Whilst similar in design to foundations in other jurisdictions, the Jersey structure introduces the concept of a ‘guardian’ with oversight over the council’s activities in relation to the foundation and ensures that it achieves the broad objectives outlined in its constitutive documents.

A foundation must have a council to administer the assets of the foundation, and to carry out its objects. The council of a foundation may have one or more members and must include a qualified person. However, although the council of a foundation may include more than one qualified person it may not have more than one qualified member at any one time.

A beneficiary under a foundation has no interest in the foundation’s assets; and is not owed by the foundation or by a person appointed under the regulations of the foundation any duty that is or is analogous to a fiduciary duty. However, if a beneficiary under a foundation becomes entitled to a benefit under the foundation in accordance with the charter or the regulations of the foundation, and the benefit is not provided, the beneficiary may seek an order of the Royal Court ordering the foundation to provide the benefit.

Guernsey

It has been confirmed that the law to enable the establishment of foundations is to be introduced by the end of 2012, and legislation to this effect has already received approval in principle from the island's government. This legislation is due to be tabled before the island's legislative assembly in July 2012, and subject to approval, will be forwarded for final ratification by the UK's Privy Council.

A six-week consultation on the proposed law was commenced in in April 2011, which invited views on a number of key areas, including: the precise nature of the foundation structure; initial capital requirements; the extent of founder powers; the consideration of fiduciary duties; taxation; and market demand for foundations.

Fiona Le Poidevin, Chief Executive of Guernsey Finance - the promotional agency for the island’s finance industry, said: “Guernsey was one of the first jurisdictions to introduce trust law and we now want to further develop that expertise and experience built up over many years in the fiduciary sector by looking towards the future and introducing new products."



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