To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
Private Client (2nd edition)
The law does not include specific asset protection rules. However, the following transfers are restricted (Israeli Bankruptcy Ordinance, 1980):
- Transfers where the transferor became bankrupt within two years will be considered void towards the trustee of the bankruptcy procedure.
- Transfers, which were made less than ten years (but more than two years) before the transferor became bankrupt will be void in respect of the trustee in the bankruptcy proceedings, unless the transferees can prove that the transferor was solvent at the time of the transfer and was able to pay its debt without regard to the transferred assets.
Transfers to certain types of trusts can shelter assets from creditors or beneficiaries. Israeli law on bankruptcy remoteness in the context of trusts is not entirely clear. Applying general rules of bankruptcy, it appears that a transfer to a trust will be protected from creditors, if it can be established that the donor ceased to control the assets in the trust and met the conditions above. Trusts that are not revocable and are controlled by disinterested trustees, can provide bankruptcy remoteness subject to the general rules of bankruptcy.
As noted above at Questions 18 and 21, foundations are not recognised by Irish law and cannot be established in Ireland.
Under the Land and Conveyancing Law Reform Act 2009, an individual cannot enter into a transaction with the intent to defraud creditors / third parties, either existing / or potential, by taking certain assets outside of the reach of such parties. Provided there is no intent to defraud, trusts can be used to shelter assets from the creditors of a settlor or beneficiary. However, certain provisions of Irish legislation, including the Bankruptcy Act 1988, the Succession Act 1965 and the Family Law Acts 1995, operate to set-aside certain transaction in the event of bankruptcy, death or divorce.
A private foundation has legal personality and could therefore, theoretically, be used to shelter assets from creditors. Since Belgium does not have its own trust law and trusts do not occur frequently in Belgian practice, it remains unclear what the position of a debtor would be if a trust would be used to shelter his assets. A lot would depend on the type of trust and the entitlements of the debtor towards (the assets of) the trust. In any case, if assets are transferred to a trust/private foundation by the debtor with the fraudulent intention to impoverish himself, a creditor who already had a claim that predates the transfer, can go to court to ask for the non-opposability of this transfer.
Irrevocable trusts set up by a settlor for third parties are generally protected against the creditors of the settlor if the settlor no longer owns the property and no longer controls the beneficial enjoyment thereof. Upon transfer into the trust, the settlor has no power to use the trust assets. In the absence of fraud, the settlor’s creditors generally cannot reach the assets in an irrevocable trust if the settlor gave up complete control.
A self-settled spendthrift trust is a type of irrevocable trust that provides the settlor with protection from creditors but does not require the settlor to give up total control. Under a self-settled spendthrift trust, the settlor can be a beneficiary and retain certain controls, such as the ability to direct investments. Once an asset is transferred to the trust, the settlor’s creditors have a limited time period to challenge the transfer and assert a claim against the asset. If the creditor fails to do so, the asset is protected. This type of trust is currently permitted in a number of states.
Irrevocable trusts can also provide asset protection for beneficiaries. A trust agreement may provide that the beneficiary’s interest is purely discretionary and can include a spendthrift provision that prevents creditors of the beneficiary from making a claim against the beneficiary’s interest in the trust. However, once trust assets are distributed to the beneficiary, the assets are subject to the claims of the beneficiary’s creditors.
Trusts are not affected in any way by succession and forced heirship rules, and the Cyprus International Trust is a particularly powerful asset protection tool, for the following reasons:
- Regardless of any bankruptcy or liquidation laws in Cyprus or in any other country, whether the trust is voluntary and without consideration, or made for the benefit of the settlor or his family members, the trust is not void or voidable. This is the case unless it is proved to the court that the trust was made with intent to defraud persons who were creditors of the settlor at the time when the payment or transfer of assets was made to the trust. The burden of proof of the settlor's intent to defraud lies with the person who is seeking to annul the transfer.
- Any action for avoidance of the trust must have begun within two years from the date of transfer or disposal of the assets to the trust.
- The Charitable Uses Act 1601 (also known as the Statute of Elizabeth), which invalidates arrangements made to hide assets from future creditors, is expressly excluded in Cyprus.
The Amending Law of 2012 strengthens these defences by explicitly providing that any question relating to the validity or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without reference to the law of any other jurisdiction. It also makes clear that the powers and duties of the trustees and of any protectors of the trusts are governed exclusively by Cyprus law.
Furthermore, it provides that dispositions to a trust cannot be challenged on the grounds that they are inconsistent with the laws of another jurisdiction, for example regarding family and succession issues, or on the grounds that the other jurisdiction does not recognise the concept of trusts.
In compliance with the relevant deadlines under insolvency law, the dedication of assets to a private foundation can be withdrawn from the creditors of the founder. If the founder has no rights in the private foundation beyond those provided by the law there is no possibility of access of a creditor against the private foundation due to the founder’s lag of property rights. By law the founder does not have any rights to assets and rights of organisation with access to assets.
As legal entitles private benefit foundations may be used to shelter assets from creditors. However, any transfer of property made to impede a creditor or to put a property out of such creditor’s reach and which is therefore harmful to the creditor can be challenged in court at which point the corporate veil could be pierced.
These foreign structures could be used to shelter assets from creditors. However and according to the particular circumstances around the set up of the given structure, creditors could eventually encourage a legal action either under Section 333 CCC (acción de simulación) or under Section 338 CCC (acción de fraude). Both actions constitute a measure of patrimony integration due to the fact that if the court issues a ruling favorable to the creditor those acts by which the structure has been set up will be regarded void and consequently those assets held in structure would be treated as if they had never left the patrimony of the involved party (Sections 334 and 390 of the CCCN).
Irrevocable and non-discretionary foreign trusts can, to a certain extent, protect one’s assets from creditors.
Monegasque courts do not have the power to undo a settlor’s transfer to a trust even if the creditor manages to prove that the transfer was made with the intention of defrauding creditors. However, Monegasque courts can order the settlor to repay the creditor the amount due, if the creditor manages to demonstrate the fraud.
Italian courts may argue that trusts providing for very intrusive powers of the settlor are not to be recognized pursuant to the Hague Convention and therefore are tamquam non esset. In other cases, Italian courts did not recognise trusts by making reference to the concept of ‘sham trust’. This concept is given a broader meaning compared to the meaning under English law. Indeed, under English law a trust is a sham only if there is an agreement between the trustee and the settlor when the trust is settled that terms governing the transfer of the funds to the trustee are not those set out in the trust deed, but are some other terms. On the other hand, Italian courts sometimes use the concept of sham trust also when the settlor has significant control over the trust fund. Furthermore, the recognition of a trust cannot affect the application of Italian forced heirship rules, if applicable.
Bermuda trusts can be used for asset protection planning. Bermuda has firewall legislation in place that can protect assets from general claims made by or on behalf of creditors.
Generally, a Bermudian court will only set aside or vary a trust that was validly created under Bermudian law in accordance with Bermudian law.
24.1 If a beneficiary (§19.2) has a fixed entitlement under a trust (§19.2), an English court generally has power to make an order for the payment of the income from the trust to be directed to a creditor of the beneficiary.
24.2 However, where a potential beneficiary (§19.2) of a discretionary trust (§19.3) has no legal right to the trust assets, an English court will not, generally, order payment of trust funds to a creditor of that beneficiary. However, the English court has power to set aside a transaction by which assets were transferred into trust with the intention of defeating the claims of potential creditors.
24.3 However, the assets of any trust (§19.2) may be regarded by an English court as a financial resource of a beneficiary (§19.2) or potential beneficiary in reckoning his liability to make payments in divorce or child maintenance proceedings, and to satisfy claims in such proceedings the English court has wide powers to make orders against the trustees (§19.2) of, in relation to the assets of, such a trust.
- In case of Colombian situs assets:
In structuring asset transfers, whether or not gratuitously made, attention should be paid to Colombian civil and commercial regulations:
- Trusts: The Commercial Code includes a provision whereby the assets of a trust negotiation cannot be pursued by the creditors, unless the debts are prior to the constitution of the trust. The creditors of the beneficiary of the trust can only pursue the financial yields the assets report. The execution of a trust with fraud can be challenged by the interested creditors.
- Specific assets and income: Colombian law stated immunity from seizure to some assets as follows: (i) property assigned as family housing ; (ii) the legal minimum salary except the 50% to provide food rents or pay debts to cooperatives; (iii) the excess over the minimum salary is only seized in one-fifth; (iv) pension payments receive the same treatment as the salary; (v) individual pension savings.
- Marital property: Under Colombian law, individuals have the freedom to dispose of their state without limitation during their lifetime. However, the disposition of certain assets may require the approval of the other spouse under Colombian marital rules.
- In case of foreign assets:
- Individuals may place assets held in their own names into trusts, private foundations, etc. in order to designate them or their proceeds to a specific purpose or persons. The assets placed into a properly structured trust, private foundation, etc. form an estate separate from the assets of the settlor, so as to avoid such assets being requested by creditors.
- Attention should be paid to foreign creditor rules when establishing a foreign structure.
The Fraudulent Dispositions Law (1996 Revision) provides that every disposition made at an undervalue with the intention to defraud a creditor can be rendered voidable at the request of a creditor prejudiced by that disposition. However, even if it can be shown that a disposition made at an undervalue (such as a disposition to a trust) was made with an intent to wilfully defraud creditors, the disposition is only set aside to the extent necessary to satisfy the creditors prejudiced by the disposition. The statute specifically provides that the burden of proof of the transferor's intent to defraud is placed squarely on the creditor seeking to set aside the disposition.
An irrevocable trust that has been effectively formed under foreign trust law can shelter assets that are governed by foreign property law and that have been transferred to the trust from claims of the settlor’s or beneficiary’s creditors.
A German private foundation is an adequate means to shelter assets from the creditors of the settlor or a beneficiary as the foundation is the only legal owner of its assets and neither the settlor nor the beneficiaries hold any property interests in the assets of the foundation or the foundation itself. Thus, assets held by the foundation are completely protected from claims by spouses or individuals that have the right to a compulsory portion in cash once those assets have been transferred to the foundation more than ten years ago.
If a trust is properly constituted, assets of the trust are generally regarded as belonging to the trust and sheltered from claims by creditors of the settlor. This is because the settlor no longer has any interest in the trust assets. However, where the settlor has extensive reserved powers under the trust, such said powers could render the trust vulnerable to attacks by creditors.
For a beneficiary with a fixed interest in the trust, his / her share may be vulnerable to attacks by his / her creditors as his / her beneficial interest is regarded as his / her property from the trust's inception. A discretionary beneficiary, on the other hand, is not generally regarded as having legal ownership in assets of the trust – an attack mounted by his / her creditors would be less likely to succeed.
However, the courts have powers to, among others, set aside –
- any conveyance of property into a trust made with the intent to defraud creditors; and
- any disposition of property made with the object of reducing the amount of maintenance payable or depriving the spouse of rights to the property.
Private foundations are not available as a wealth planning tool under Singapore law as the foundations are a civil law concept.
In general, possible Portuguese structures are based on the separate legal entity status. However, several exceptions to separate legal entity status exist in the Portuguese legislation, namely if the structure constitution is deemed to aim at avoiding creditors.
Trusts and private foundations can be used to shelter assets from the creditors of a settlor or beneficiary of the structure with caveat already explained before (§22.).
Obviously, trusts and/or private foundations cannot be used for organising the insolvability of the settlor.
By using Liechtenstein foundations and trusts as estate planning tools a very comfortable level of asset protection can be obtained.
Creditors of a settlor/founder who cannot recover damages against him because he has transferred assets to a foundation/trust may dispute this endowment according to the Liechtenstein Legal Remedies Code. The general limitation period under the Legal Remedies Code is 5 years after the endowment.
In addition, creditors of a settlor/founder may, in very exceptional cases, gain access to the assets of the structure by way of "reverse piercing" if they are able to prove intended abuse of the structure by the settlor or founder and the factual control by the settlor or founder over the structure.
Creditors of discretionary beneficiaries of a trust/foundation can only be indemnified out of distributions which have already been made to the beneficiaries.
For Mexican legal purposes, a trust (understood as a Fideicomiso in the terms of Mexican Law) cannot be used to protect the assets of any of the trustors from a creditor if the trustors are the beneficiaries, since now the assets to be claimed are the rights on the trust.
In accordance with the Mexican Federal Civil Code, the debtor responds of the fulfillment of its obligations with all its assets (including his rights under a trust), except those that are inalienable and indefeasible, independently that these had been or not cause of the debt.
With the foregoing, Mexican legislation guarantees creditors the fulfillment of their obligations, since it constitutes a kind of guarantee in favor of the creditor with all the assets and rights of the debtor, except those that are inalienable or unattachable according to the law.
As indicated before, in a trust agreement, the trustor transmits to a fiduciary institution the ownership of one or more assets or rights, as the case may be, to be used for lawful and specific purposes, entrusting the realization of said purposes to the fiduciary institution itself.
In this regard, when a person establishes a trust in Mexico, ownership of the assets that are affected by the trust is transferred to the fiduciary institution, so that it can be used to fulfill the purposes of the trust.
In this context, if any of the trustors is sued by a creditor after having contributed the assets to the trust, said assets would no longer form part of his own assets, so they could not be seized for the purpose of paying off the outstanding debt.
Notwithstanding this, and in accordance with the regime explained in previous paragraphs, if said trustor has any right derived from the trust (such as the right of reversion or the right to receive any return, product or proceeds of the trust assets), the right would be considered part of the assets of that trustor, so its creditors could affect it for the purpose of liquidating their respective debts.
On the other hand, it should be noted that if the debtor decides to affect his assets in trust knowing that he can be sued by his creditors, this act can be considered as an act in fraud of creditors under the terms of article 2163 of the Mexican Federal Civil Code. Pursuant to that provision, the acts entered into by a debtor to the detriment of his creditor may be annulled, at his request, if the insolvency of the debtor results from those acts, and the credit under which the action is sought is earlier to them.
In general, once the shareholders have set up the ‘sociedade limitada’ and transferred out the assets to the company, such assets might benefit from a relatively protection of creditors of a shareholder individually considered. However, in order to achieve such protection, the transfer should have been done before the debt is enforceable before a Court of Law.