To what extent can trusts, private foundations, etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
The structure of an entity to shelter assets from creditors depends upon the timing of the settlement of trust and the type of the trust that is settled. For instance, as per the bankruptcy law of India, if assets are transferred by an individual for inadequate consideration and if such an individual is adjudged insolvent within 2 years of such transfer, then such transfer will be considered void/voidable. Furthermore, if the trust is a determinate trust and if an insolvency proceeding is initiated against a beneficiary of a determinate trust, then unfortunately the assets of the trust may not be insulated from insolvency proceedings initiated against the beneficiary. Thus, proper planning and structuring is required to achieve bankruptcy remoteness.
The private foundations and the companies are separate legal entities, therefore they may be used to shelter assets from the creditors of the settlors. However any illegal actions or actions aimed at wilfully harming creditors may be subject to challenge through court proceedings. Piercing of the corporate veil may apply in the same cases.
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 of potential, by taking certain assets outside of the reach of such parties. Provided such an intention does not exist 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.
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 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.
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.
Under Israel’s Bankruptcy Law, the transfer of assets to a trust can be ignored in certain circumstances.
Given that the Greek legal framework is currently going through its early stages in understanding, recognizing and analyzing foreign trusts and private foundations -with limited legislative material and even lesser case law available- it would be a highly risky exercise to predict the outcome of such judicial proceedings in Greece.
Nevertheless, interested parties [settlors, beneficiaries etc] may expect to utilize a few international practice tools in Greece when attempting to facilitate efficient asset protection schemes.
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.
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.
British Virgin Islands
There is, in the BVI, no equivalent to the ‘asset protection’ legislation which has been enacted. in some of our competitor jurisdictions such as the Cayman Islands, The Bahamas and, perhaps most conspicuously, the Cook Islands. It is understood that the authorities declined, as a matter of policy, to succumb to pressures to enact such laws in order to protect the jurisdiction’s reputation on the basis that a high profile case might tarnish the jurisdiction’s reputation. The 1571 Statute of Elizabeth is thought to apply in the BVI and similar provisions are contained in section 81 of the BVI’s Conveyancing and Law of Property Act (which is worded identically to section 172 (1) of the English Law of Property Act 1925). Accordingly the English cases relating to the Statute of Elizabeth and section 172(1) of the 1925 Act would be of persuasive authority in the BVI. Whilst it contains no equivalent to section 423 of the English Insolvency Act 1986, the BVI’s own Insolvency Act, 2003 contains detailed provisions enabling transfers by individuals and companies to be set aside in appropriate circumstances. Section 40 of the BVI’s Matrimonial Proceedings and Property Act also contains provisions enabling certain transfers which are made to defeat financial provision under that statute to be avoided, but that section will only apply to certain BVI residents.
At present, there are no specific asset protection laws applicable to trusts or the proposed foundations within the DIFC.
New Zealand does not have dedicated asset protection legislation. That is, in comparison with other countries, it does not have legislation which limits overseas creditors gaining recourse against assets in New Zealand. However, in practice, foreign creditor relief is extremely limited in New Zealand.
New Zealand’s creditor rules are contained in its Insolvency Rules. They apply to a New Zealand resident who has received assets or made disposals within two years of his or her insolvency, whether or not the transferee is in New Zealand. Such transactions may be set aside by the Official Assignee. The Official Assignee has the power to realise and recover assets for the benefit of that person’s creditors. With regard to a preferential payment, if it is made within six months of the date of an act of bankruptcy, then the transaction may be set aside without proof of an intention to defeat creditors. Otherwise the transaction may be set aside within the remaining 18-month period only if an intention to defeat the claiming creditor is proven. Outside of the two-year period, proof of fraud against creditors must be shown before a transaction can be set aside.
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.
As a rule, creditors of an individual cannot attach assets that are in an irrevocable trust or in a foundation. However, Swiss bankruptcy law provides for a number of avoidance actions of the ground of fraudulent conveyance.
23.1 If a beneficiary (§19.1) has a fixed entitlement under a trust (§19.1), 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 (§19.1) of a discretionary trust (§19.2) 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 (§19.1) may be regarded by an English court as a financial resource of a beneficiary (§19.1) 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 (§19.1) of, in relation to the assets of, such a trust.