In 2009, I wrote an article on ‘The United States as an Asset Protection Jurisdiction’, suggesting that non-US persons domiciled outside the US could establish ‘offshore’ trusts in the US which could protect assets from their creditors.
Reliable and Sustainable Partn…
The US now has 17 states which have adopted legislation permitting ‘self-settled spendthrift trusts’. (These are trusts established by the settlor for the settlor’s own benefit.) Each of the 17 states has its own period of limitations within which a creditor of the settlor may attempt to reach the trust assets, and the trustee will defend the attack based on its state law and not the state law of the settlor.
The suggestion in my earlier article that the US is worth considering as an asset protection jurisdiction for non-US persons remains alive and well, but whether it is at the same time an equally favourable jurisdiction for US persons, remains to be seen.
For non-US settlors, a US asset protection trust offers the considerable advantage of requiring the non-US creditor to come to the US and bring the action here to satisfy the claim, and the action must be brought within the applicable period of limitations. Further, if the creditor already has a judgment, the recognition of foreign judgment rules and procedures must be followed. In either case, it would involve a costly and time-consuming process without any guarantee of success.
US settlors, on the other hand, have to worry about a huge unknown with respect to such trusts. Our federal Constitution provides that each state must give “full faith and credit” to the judicial proceedings of every other state. In other words, a judgement from the state of New York may be enforced in the state of Delaware or any other state. But does this include enforcement against a Delaware asset protection trust settled by the judgement debtor? We cannot even say that ‘the jury is still out’ on this question, because there has been no case adjudicating this nor is there any pending that we know of.
Still another serious deterrent to the US settlor is the recently promulgated Uniform Voidable Transactions Act (UVTA). Uniform acts of this sort are common in the US (eg, the Uniform Transfers to Minors Act, the Uniform Trust Code), and after they are finalised by the particular committee drafting the Act and approved by the Commission, they are considered by each of the 50 states for enactment. (As of this writing, eight states have enacted the UVTA.) The UVTA suggests in it comments to the law that transfers to a self-settled asset protection trusts are per se voidable (during the applicable limitations period) and that the burden of proof may be on the settlor to prove otherwise. The foregoing statement is offered as indefinite because there is no case law on the issues and the Act has only recently been approved by the Uniform Law Commission. Nevertheless, it is a clear attempt to discourage such trusts and encourage the states and their courts to do the same.
Thus, although a US settlor who forms a US asset protection trust can be assured of placing a considerable obstacle in front of the creditor, he cannot be assured the obstacle will not ultimately be overcome for various reasons, including avoidance of the transfer to the trust under the Uniform Voidable Transfers Act, Constitutional law challenges, and conflict of law issues between the two (or more) states. For these reasons, US persons who desire serious and far more secure asset protection will choose an offshore jurisdiction for their asset protection.
What typically accompanies offshore trusts, however, are additional US annual reporting requirements (although such trusts are typically tax-neutral), and the movement of client funds to another part of the world. Nevertheless, such concessions are acceptable in light of the added protection offered. The first question in this regard, however, is where to settle the trust? Most attorneys familiar with available choices will argue that the most commonly selected jurisdictions are Liechtenstein, the Bahamas, and the Cook Islands, followed (where there are no existing claims) by Gibraltar and the Isle of Man.
The first three are favoured because of their short statue of limitations, which applies to creditors existing at the time the trust is settled, and their heavy burden of proof, that the creditor must prove fraudulent (prejudicial) intent (as to the particular creditor making the claim) beyond a reasonable doubt, and their considerable experience with asset protection cases. For the second two jurisdictions, only future creditors are ruled out. Claims arising after the settlement may not be pursued so long as the settlement did not render the settlor insolvent. Existing creditors have considerable leeway to bring suit.
About the Author
Alexander A Bove Alexander A. Bove Jr. of Bove & Langa, is an internationally known and respected trust and estate attorney with over thirty-five years of experience. He is Adjunct Professor of Law, Emeritus, of Boston University Law School Graduate Tax Program, where he taught estate planning and advanced estate planning for eighteen years. Prior to that he taught estate planning for four years at Northeastern University Law School. In 1998 he was admitted to practice as a Solicitor in England and Wales. In addition to his J.D. and LL.M. degrees, in 2013, he earned his Doctorate in Law from the University of Zurich Law School.