Asset Protection Trusts - Theory And Practice

Asset Protection Trusts (APTs) first came to prominence in the USA in the mid 1980s. The underlying concept behind an APT (sometimes called an Integrated Estate Planning Trust (IEPT)) is merely to bring estate planning theory, which used to focus on death or terminal planning, into line with the new reality of clients:

  1. Living very much longer, and
  2. Becoming richer at much earlier in their life.

The basic issue is that many middle class Americans are now worth several million dollars in their mid to late forties. Then by the time they are in their mid-sixties, this is often some tens of million of dollars. Clearly any competent lawyer preparing an estate plan for a client who is in his (or her) late forties (with a future life expectancy of perhaps fifty years) is bound to consider the portfolio of threats to that wealth when preparing the plan. The threats to be considered must be:

  1. From the State - Death/gains tax etc.
  2. Personal - Divorce, financially incompetent relatives, physically disabled dependants
  3. Economic - Structure of investments, perhaps too much exposure to one economic sector, e.g. real estate
  4. Political - Too much invested in developing or less stable economies
  5. Business - Consequences of business errors by self, staff or colleagues
  6. Legislative - Trends for the legislatures to shift risks from the body politic to wealthy individuals, i.e. under-funded pension schemes

As will be seen there are numerous areas for the estate planner to be concerned about when creating an integrated estate-planning vehicle. Historically, there have been various strategies adopted to address the risk portfolio described above. These include:

  1. Gift giving (particularly between spouses)
  2. Insurance based shelters
  3. Various types of trustee arrangements

The difficulty with many of the gifting arrangements, however, is that circumstances change over time. Therefore, while a gift or contingent gift of several million dollars to a child may seem like a good plan when the donor is in his early sixties, he may bitterly regret the donation twenty years later, particularly if the circumstances for all parties have changed dramatically. Similarly, insurance products can have their drawbacks because legislation over the long term can change dramatically and hamper tremendously the financial outcomes of the structure.

Given the practical long run limitations of some of the planning techniques available, many practitioners have determined that some sort of trustee structure is the most appropriate vehicle for long term estate planning, essentially because such structures can be designed to be extremely flexible over time. Hence the birth of the so called Asset Protection Trust. What is interesting from an academic point of view is that inappropriateness of the APT term, which while being a term of act is, of course, technically quite incorrect. Principally because trusts have traditionally been classified by the means which created then. Hence we have:

  1. Express Private Trust (EPT)
  2. Constructive Trust
  3. Resulting Trust
  4. Secret Trust

Therefore to classify a trustee structure by its effect rather than its means of creation would seem to be formally incorrect from a purist point of view.

The big difference between a straightforward IEPT and an APT is that the APT is often aimed at controlling business risk, while the IEPT is probably aimed at mitigating, say, taxation or economic risks, as well as business risk. However, what cures one may well cure all, or at least affect the other. From an English proper law point of view, however, the APTs could have a fundamental Achilles heel and that is the Statute of Elizabeth. Under this ancient stature (and subsequent case law) it is against public policy for the courts to uphold a trust, the intention for the creation of which is to defeat future creditor claims. In its historical perspective the stature seems quite sensible (since in the early 17th Century it was not possible to form companies with statutorily limited liability). Therefore, to allow merchants to place capital out of future creditors reach (in all circumstances) may well have led to reckless trading and hence damaged the economy.

However, matters have now moved on and the portfolio of risk to capital is ever expanding. Furthermore, in some jurisdictions (notably the US) the amount of risk in the threat analysis is large and becoming more and more skewed towards business risk. (Witness the fallout from Enron and MCI now requiring CEO and CFO to personally certify the veracity of the company's accounts each year). To cope with this upsurge in business risk, practitioners in the USA have been turning more and more to the APT or IEPT as a legitimate tool in the their risk management armoury. Basically, practitioners have three options:

  1. Bespoke legislation (e.g. Cook Islands, Labuan , Honduras , etc.)
  2. Time Limit Jurisdictions (e.g. Cayman and Bermuda)
  3. Trial De Novo Jurisdictions (e.g. Jersey, Guernsey, Isle of Man)

Those making use of the bespoke legislation jurisdictions prefer a “bright line” test actually in the statutes. For example, if no claim against a settlor is made within on year of a trust's creation date, then any claim against the trustee assets is time barred. This is basically the approach in the so-called time limit jurisdictions but the time limits are much broader than in the bespoke jurisdictions (for example six years in the Cayman Fraudulent Disposition Act).

However, in the Trial de Novo jurisdictions the position used to be somewhat uncertain. For example, in Jersey only orders made by English, Scottish, Northern Irish, Isle of Man, Guernsey, and Australian bankruptcy courts are automatically enforced. The basic procedure is to produce, for example, the US Judge's order in court and then sue on the order as though it was a debt instrument. Clearly the defending counsel can then argue that the order ought not to have been granted under the terms of the relevant law (perhaps procuring expert witnesses to assist), and effectively invite the court to re-try the matter under Jersey Law.

Here, until the recent past, matters could become a little uncertain. The position under statute for a Jersey resident or someone doing business in Jersey was quite clear. Under the terms of the Bankruptcy (Desastre) Jersey Law 1990, the Royal Court had an absolute discretion to set aside any transfer at under value between any two persons made within two years of the bankruptcy. Furthermore, it could set aside any transfer at under value within five years of the date of transfer if it could be shown that the transfer in question had led to the bankruptcy. However, these provisions do not relate to non-residents. Here the court historically has looked at the law of the domicile of the debtor.

For many US practitioners the Supreme Court judgement delivered by Mr Justice Antonin Scalia in the Grupo Mexicano case will have great influence. As was so ably pointed out by Denis Kleinfeld (Offshore Investment Issue 128), it has been the settled law of the United States for 200 years that “a creditor has no cognisable interests in the assets of a debtor prior to obtaining a judgement”. As Kleinfeld says, basically a debtor can transfer his assets all day long until the Sheriff shows up to execute on a writ. If this is the case then it is extremely likely that the Royal Court of Jersey would be greatly influenced by this judgement, particularly so when given its great authority in relation to US connected transfers.

Let us assume, therefore, that the Jersey Royal Court accepts the dicta in the Grupo Mexicano case and determines that it does not have the local statutory power to set aside a non-resident's transfer to a Jersey Trustee, other than on public policy grounds. The last attack available in Jersey would be a common law Action Pauline (action in reduction) attack. Since such actions are relatively uncommon in modern times there has been some uncertainty amongst Jersey lawyers about whether such an action would be effective. However, this further uncertainty has been hugely removed as a result of the dictas in the Grupo Torres case. (Grupo Torres SA v Sheikh Fahad - Royal Court of Jersey - January 2001). In the judgement on the Grupo Torres proceeding, the learned judge held

  1. There must be a pre-existing creditor/debtor relationship prior to the creation of the trust
  2. Any proposed payment may not be made to a beneficiaries creditors against the express will of the beneficiary concerned

The important point, of course, for integrated estate planning is that post settlement creditors are apparently unable to avail themselves in Jersey of an Action Pauline attack on the trust fund.

In summary, therefore, since the Grupo Mexicano and the Grupo Torres judgements it is clear that Jersey is a much more interesting jurisdiction from an integrated estate planning point of view. Furthermore, since Jersey (unlike for example Honduras) has a full range of international asset managers available on the Island, the assets contained in a trust fund can actually be lodged here under the supervision of the Royal Court. As will be remembered, this was not the situation in the Lemos Case (1992-93 CILR 26), where the assets of a Cayman trust were being managed in London . In that instance the assets were frozen and then attacked in London on the legal capacity of the settlor to set up a Cayman trust under Greek Law (he was a Greek domiciliary). The English Courts not the Cayman determined that under the general principles of international private law he did not. Thus it is very unwise to rely on the law of an offshore territory if the assets arte to be held onshore for management purposes.

Finally, Jersey does not permit local lawyers to act for contingent fees. Furthermore, the trustee is perfectly entitled to ask for security for his legal costs as the plaintiff is non-resident in Jersey. Consequently, as a practical matter, it would have to be quite a serious adverse party who would come to Jersey to overturn a Jersey IEPT.

E L Bendelow
Chairman of Basel Holdings Limited
Basel Trust Corporation Group
January 2003

Edmund (Ben) Bendelow is Chairman of Basel Holdings Limited, and is a specialist in international estate planning. His clients include high net worth individuals, private and public corporations, international financial institutions and governments. He is particularly interested in estate planning for multi-resident individuals and in the developing role of E-Commerce in the international business world.

He frequently writes and lectures, and serves as a non-executive director on the board of a number of members of publicly quoted groups. As well as his financial services business interests, Ben has extensive commercial interests in information technology, international consulting and various professional service firms. He received his BSc from the University of Wales and his MBA from the University of Exeter . He is also the Honorary Consul for the Republic of Iceland in Jersey, Channel Islands .

Amongst other positions, he is President Emeritus, Executive Committee Member and Chairman of the European Branch of the Offshore Institute, as well as a member of several other professional bodies, including STEP. He has also had articles published in Offshore Investments, Shore to Shore, Offshore Finance Year Book and numerous other professional publications.