Cormac Brennan of McCann FitzGerald Solicitors looks at the practical application of asset protection structures in Ireland, particularly in light of the current economic climate.
The issue of asset protection has become increasingly relevant in the current economic climate in Ireland. Plummeting property values have left many borrowers exposed, and many clients with significant borrowings wish to ensure, insofar as possible, that a portion of their assets can be protected in a worst case scenario, where they may be unable to meet their debts in the future. This is often manifested in the practical imperative of putting assets out of the reach of creditors.
For some borrowers, it is too late to consider asset protection structures, as they may already be insolvent, but for those who remain solvent, taking action now can effectively ringfence some assets against creditors.
The issues arising include: When should one start protecting assets? What assets should be protected? What mechanisms are available to protect assets? What are the benefits and potential downsides of introducing such protection?
Where clients have significant borrowings it is often prudent for them to consider divesting themselves of certain ‘vital assets’ (for example the family home, investments or cash) so that creditors cannot claim against those assets, particularly in circumstances where borrowings have been taken out in the name of the client individually, or the client has given personal guarantees in respect of borrowings of related companies. At the same time, clients frequently wish to retain the assets for their own use and enjoyment during their lifetimes and have as much control over them as possible.
Creditors can be categorised separately, as present, potential or future creditors:
How Assets are Protected
Assets may be protected through a range of mechanisms, some straightforward and others more complicated.
Use of Trusts
Frequently trusts are used as an asset protection mechanism, so that the person who owns the assets (the ‘settlor’) transfers the assets to trustees to hold solely for the benefit of the settlor for his lifetime, with the assets passing on the settlor’s death in a certain way (for example to his spouse and/or children). In these circumstances it is important to be aware that the beneficiary of the interest in possession (ie, the settlor) has a right to receive the income from the trust, and if he should become bankrupt his creditors could require the trustees to pay that income to them to meet the debts incurred. However, the capital of the trust would be protected for the remainder beneficiaries.
As an alternative, a discretionary trust can be established for a class of beneficiaries including the settlor and his family. The effect of this is that funds would still be available to the settlor through payments by the trustees to his family or on a discretionary basis to discharge outgoings actually incurred by him, yet he would not automatically be entitled to the assets if his creditors seek to recover from him.
Frequently these types of trusts are established offshore to put in place a further obstacle to creditors. However, offshore trusts, particularly those located outside of the EU, can introduce adverse taxation implications.
Transfers to spouse/children
The most straightforward and the most tax effective method of protecting assets is to transfer them to a spouse, provided that the client is comfortable with the spouse owning the assets solely going forward. Family law implications need to be carefully explained to clients in these circumstances as any transfer of assets between spouses could ‘muddy the waters’ in the event of marital breakdown. Clients are generally comfortable in transferring the family home to their spouse, although it would be sensible to do so only where all borrowings have been cleared in advance of the transfer.
A further option (particularly where the spouse is also involved in the business or otherwise has significant liabilities, and may therefore also be vulnerable to being made a bankrupt) is to transfer assets to children, or on trust for them until they reach the age of 18. This type of transfer will however generally trigger taxes, depending on the type of asset transferred.
Again it would seem sensible to transfer only assets that have no borrowings secured against them. In addition, clients are generally concerned not to transfer significant assets to their children until they have the level of maturity to deal with them sensibly.
Legal Issues – Voidable Transactions
If assets are transferred into any asset protection structure, including a transfer to a spouse, care must be taken to ensure that legislative provisions will not apply to set aside the transfer and make the assets available on bankruptcy.
The first step is to ascertain that the client is currently solvent, and for the client to swear a declaration of solvency stating that he is solvent without recourse to the assets proposed to be transferred. In addition, it would seem sensible for the client to support that declaration with a statement of net worth that has been prepared and analysed critically by a professional.
However, even where this process has been carried out, if the client is ultimately declared bankrupt within two years of any voluntary transfer, this transfer can be declared void whether or not the client was in fact insolvent at the time of the transfer. A voluntary transfer can also be set aside if bankruptcy occurs within five years of the transfer (but after the two year period has passed), although it would be a good defence for the client to show that he was solvent at the time when the transfer was made without recourse to the property transferred.
In addition, under the Land and Conveyancing Law Reform Act 2009, where a conveyance of property is made with the intent to defraud creditors, such a conveyance is voidable unless the conveyance is bona fide for full consideration to a person not having notice or knowledge of the intended fraud. There is no time limit on this provision, although in this case the intent to defraud would have to be proven, which can present difficulties.
Similar provisions are also included in the NAMA Act 2009, which establishes the National Asset Management Agency (NAMA). The Agency is a statutory corporation established to acquire (principally) security over development land owned by designated credit institutions where the loans are impaired. Under Section 211 of the NAMA Act, NAMA has power to apply to Court to set aside transactions executed by a debtor with the effect of prejudicing NAMA. The Court will be empowered to declare a disposition to be void if, in its opinion, it would be just and equitable to do so. It is unclear as yet whether any time limit applies to the setting aside of such transactions and this provision has not yet been tested.
While taxation is generally not at the forefront of clients’ minds, it is also important to consider taxation in the overall context of asset protection in order to avoid triggering significant taxes where possible.
On the creation of an asset protection structure, the client is disposing of his assets and effectively putting them out of his (and his creditors’) reach. This means that for tax purposes, he is disposing of his assets and, unless the disposal falls into any of the available exemptions or reliefs or is a disposal of a non-chargeable asset, there are likely to be Irish capital acquisitions tax, capital gains tax and stamp duty implications on the creation of the structure. For this reason, the client would generally attempt to limit the amount and type of asset put into the trust to cash assets and assets that will not trigger a significant tax charge; as to do otherwise would create a further debt for the client (a tax charge).
On the transfer of assets from an individual client to his spouse, any capital gains tax, capital acquisitions tax or stamp duty that would normally arise will be exempted. Therefore, at least for taxation purposes, the transfer of assets to the spouse can be the most efficient method of asset protection. However, as mentioned above, such a transfer may not provide any protection depending on the exposure of the spouse in his/her own right to liabilities or potential liabilities.
Ireland as an Offshore Asset Protection Trust Jurisdiction
Similarly to Irish resident individuals frequently opting to establish offshore trusts with a view to increasing the level of asset protection, Ireland can be an attractive jurisdiction for the establishment of asset protection trusts by non-resident individuals with no connection to Ireland, and where the trust assets would not consist of Irish property.
Ireland is a member of the European Union and as such is an OECD ‘white list’ jurisdiction. The establishment of an Irish offshore trust in circumstances where there is otherwise no connection with Ireland can, if carefully structured, present significant tax planning opportunities wherein charges to Irish taxation should not arise.
For many clients considering asset protection structures, the main conceptual difficulty is the loss of control over the use of the assets, whether this control passes to trustees or to the spouse or other family members. However, if the settlor should effectively seek to retain too much control over the assets, the arrangement is likely to be set aside as a sham.
In addition, if the settlor does in fact become insolvent in the future there can be difficulties in benefiting him or her from the asset protection structure (ie, without those funds themselves being subject to a claim by his creditors). However, with careful planning, this issue can be dealt with in practice.
Any asset protection mechanism, other than a transfer of assets to a spouse, is likely to give rise to certain tax implications and detailed tax advice should be sought in addition to appropriate legal advice.
 Section 58 of the Bankruptcy Act 1988
 Section 74(3) of the Land and Conveyancing Law Reform Act 2009.
Cormac Brennan is a solicitor and tax advisor, and a Partner in O’Connell Brennan Solicitors, Dublin. O’Connell Brennan is a boutique private client law firm, established in 2012 by Susan O’Connell and Cormac Brennan following the demerger of the private client practice of McCann FitzGerald Solicitors.