Article: Asset Protection

Anthony R. D'Aniello, MBA, LLB, JD, TEP
President
STANFORD TRUST COMPANY LIMITED

Introduction

It is naïve to think that we live in a world that is fair and certain. It is, therefore, only natural for an individual, particularly one who has worked hard all his life in order to accumulate real wealth, to seek some form of insurance against the vicissitudes of life.

Asset Protection

Asset protection is the process of structuring a client's financial affairs to safeguard his assets against certain risks. A trust is the most popular structure to safeguard assets, protect them from expropriation and help reduce or manage risk.
 
An asset protection trust is a traditional trust structure created offshore. It usually comprises the creation of a trust by appointing corporate trustees, carrying on trust business offshore, who hold shares in an underlying asset holding company (IBC) in trust for discretionary beneficiaries. This trust structure is mainly designed to protect assets from claims that may be brought against the settlor of the trust by third parties.
 
Trusts created for asset protection purposes rely on the principle that once the trust property has been transferred by the settlor to the trustees, it no longer represents property owned by the settlor. It henceforth belongs, in law, to the trustees.
 
Trusts have been used for asset protection purposes for centuries. They have undergone a small renaissance over the last couple of decades, particularly in the U.S., where the phrase “asset protection trusts” seem to have originated. The increased interest in asset protection trusts by potential settlors domiciled in that jurisdiction has coincided with an increase in highly competitive market conditions, and the increased willingness of that society to litigate, where speculative lawsuits against wealthy dependants have proliferated and where awards of damages, often assessed by a jury, sometimes seem to have no correlation to actual loss sustained.
 
The creation and management of offshore trusts as an aspect of risk management for high net worth private individuals plays a significant part in the process of asset protection planning.
 
You will appreciate that the use of asset protection trusts as a form of risk management creates two competing, conflicting interests: the rights of the lawful creditors of the settlor to be fully and punctually paid; and the rights of the debtor and his beneficiaries under a properly constituted trust on the other.
 
The rights of the creditors in these circumstances have been protected by legislation dating back to the sixteenth century by the Statute of Elizabeth. Some jurisdictions, however, predominantly the offshore financial centres, have instead elected to protect the interests of the debtor by introducing legislation which strives to preserve the trust for the benefit of the beneficiaries (and indirectly the settlor, especially of he or she is also a potential beneficiary) whenever it considers it is reasonable to do so.
 
Most of the offshore jurisdictions have affirmed the principle originally propounded by the onshore counterparts that a person’s assets should prima facie be available to meet his debts. What offshore legislation has done in the majority of centres is to repeal the Statute of Elizabeth and create a modern equivalent thereby striking a balance between the protection of creditors (so that they may enforce payment of their debts from the assets of their debtors) and the protection of debtors (so that the trust structure may be insulated from claims made against the settlor by creditors in certain defined circumstances). In other words, they have made trusts created in or otherwise governed by the laws of their jurisdiction less open to attack by creditors of the settlor.

Conclusion

The modern asset protection trust plays a significant part in the process of asset protection planning. This is a process involving the organization of one’s assets and affairs, in advance, so as to safeguard them against risks to which they would otherwise be exposed, in particular, claims made by creditors. A note must be made that no asset protection structure, even in the most secure jurisdiction, can be completely watertight. However, it is still proper in the correct circumstances to advise a reasonable and respectable client, who is perhaps in a high-risk line of work, and who is genuinely concerned about the risks of liability to future creditors, about the extent of the protection that can be afforded by modern offshore asset protection legislation.