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 (3rd edition)
- 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.
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.
Pursuant to the Section 3 (2) Law 69 (I)/1992, a CIT shall not be void or voidable and no claim can be brought in respect of assets transferred to a CIT in the event of the settlor’s bankruptcy or liquidation or in any action or proceedings against the settlor’s property at the suit of his creditors, notwithstanding any provision of the laws of Cyprus or of any other country.
A CIT may be set aside by the settlor’s creditors to the extent that it is proven to the satisfaction of the Cyprus Courts that the CIT was made by the settlor with the intent to defraud the creditors. The onus of proof of this intent shall be on the creditors. An action against the trustees to avoid the trust on grounds of fraud must be brought within two years of the date of the transfer.
a. Assets settled in a properly constituted trust are generally sheltered from claims of creditors of a settlor, as the assets are regarded as the assets of the trust. That said, Hong Kong courts may set aside such settlement if it is satisfied that the settlement of the property into the trust was made with the intent to defraud the creditors. Extensive power reserved by the settlor in the trust deed may also cause the trust to be vulnerable to creditors’ attack
b. In the case where a beneficiary has fixed interests in a trust, Hong Kong Courts have power to make an order for payment of the income (if any) from the trust to a creditor of the beneficiary.
c. There is no private foundation under Hong Kong law.
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 the Mexican Federal Civil Code. Pursuant to its provisions, 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.
Trusts generally provide the ability to ring fence the assets from future creditors of a settlor or beneficiaries. The shares of a beneficiary are protected until the trust property is distributed. However, in certain circumstances under the Trusts Act, Insolvency and Bankruptcy Code, 2016 (“IBC”), and ITA, the trust may not offer complete protection in this regard. The Trusts Act provides that a trust created for an unlawful purpose is void. A trust created for the purposes of defrauding creditors would amount to an unlawful purpose. Further, the IBC imposes a two year look back period from the date of insolvency in case of transfers that are for inadequate consideration. Therefore, assets which are settled into the trust would not be completely ring fenced for the first two years from the date of settlement. Further, a settlement or gift by a settlor effected during the pendency of any proceeding under the ITA against him is void against any claim in respect of the tax or other sum payable.
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.
Monegasque law provides that acts made by a debtor which diminish its assets with intent of defrauding creditors are considered void as against those creditors.
Creditors have to prove that the act was made with malicious intent. Moreover, the bad faith of the third party must be established when the act was made against payment.
However, lack of case law applying this rule to trusts raises uncertainty on its application and effects.
In the event that assets are located abroad, the decisions of Monegasque courts would have to be enforced according to the laws of the foreign jurisdiction’s courts and will have to respect the public policy applicable to trusts in that jurisdiction.
According to Polish forced heirship regulations, the transfer of assets to a foreign trust and a foreign private foundation would be deemed as a donation made in favour of a third party, being in violation of the heirs’ rights and, therefore - treated as the estate – would constitute a base for calculating compulsory shares.
In general, a person entitled to a compulsory portion of the estate is entitled to have his/her claim augmented if assets are transferred to a trust within 10 years prior to the succession event.
According to the Polish Civil Code, creditors of the settlor/founder who cannot recover damages from him/her because he/she has transferred assets to a trust/foundation may dispute this endowment (actio pauliana). The general limitation period is 5 years after the endowment.
Legal autonomy concerning private foundations will, in principle, be respected. However, in certain circumstances, recent case-law accepts that such autonomy may be disregarded for foundations.
Please see questions 18 and 21. Russia does not recognise any forms of trusts, thus, it is not possible to establish such structures in Russia and use them as a shelter.
In case an endowment is established by way of a Will for a public benefit purposes, the assets, rights and money designated to be passed on to such endowment upon death of the deceased will be not be treated as being the part of his estate.
It is not possible to shelter assets from the creditors in case of an endowment created by a Will for private purposes.
In case of a validly created trust or foundation, the assets are generally sheltered from the creditors of a settlor and/or beneficiary. However, there are claw back provisions that can apply following insolvency of a settlor if he/she transferred assets to a trust or foundation to defeat creditor’s interests. In addition, transfers to a trust or foundation by the settlor during his/her lifetime may be subject to claw back claims of heirs if Swiss forced heirship rules are violated.
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 (other than, in certain states, the settlor’s divorcing or widowed spouse) 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.
The trust structure is robust against creditor claims against the settlor of the trust. However, this will not apply where the trust is merely a device, façade or sham intended to give third parties or the court an appearance of creating legal rights and obligations between the parties that are different from the actual rights and obligations that the parties intended to create (see, for example, Gaye Williams Nee Marks v Cary Donald Williams  SGHC 190).
The case of Chng Bee Kheng v Chng Eng Chye  2 SLR 715 (“Chng Bee Kheng”) specifically addressed the issue of sham trusts. In Chng Bee Kheng, the executrices and trustees of a deceased woman claimed that the deceased’s son was holding a property in trust for the deceased pursuant to a trust deed. In response, the son claimed that the trust deed was a sham for the purposes of creditor protection. The High Court, in finding that the trust was not a sham trust, considered that the crux of the sham concept was a subjective “common intention to mislead” on the part of both the settlor and the trustee.
Singapore’s trust law also has firewall provisions in relation to trusts set up in Singapore. Section 90(2) of the Trustees Act provides that no rule relating to inheritance or succession affects the validity of a trust or the transfer of any property to be held in trust if the person creating the trust or transferring the property had the capacity to do so under the law applicable in Singapore, the law of his domicile or nationality, or the proper law of the transfer.
An irrevocable and discretionary trust (as well as a private foundation) is a suitable tool to shelter assets from creditors, if properly set and administrated by an independent trustee, without the involvement of the settlor and/or beneficiaries. Nonetheless, since the legal structures available under Israel’s Trust Law are insufficient, under-developed and under-protected from creditors’ and beneficiaries’ claims, foreign common law trust structures (including private foundation) are better suitable to ensure assets protection. In the event that the owner of an asset is reluctant to hand over control to an independent trustee, it is common to use offshore holding structures that make it difficult (although not impossible) for creditors to track and locate the assets and link them to the ultimate beneficial owner.
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 (§21.).
Obviously, trusts and/or private foundations cannot be used for organising the insolvability of the settlor.
Where assets governed by foreign property law have been transferred to an irrevocable trust effectively formed under foreign trust law, the trust can shelter these assets from the settlor’s or beneficiary’s creditors.
Since private foundations are recognised, they generally are an appropriate means to shelter assets from creditors.
23.1 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.
23.2 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.
23.3 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.