Offshore Asset Protection

In 1989, the Cook Islands enacted the world's first asset-protection trust law.[citation needed] A key feature of the Cook Islands International Trusts Act (1984) is that the settlor of a trust may establish a spendthrift trust in which the settlor is a beneficiary. In the United States and England, a common law doctrine developed to prevent trust settlors from enjoying the benefits of a spendthrift trust; it was regarded as void against public policy for a trust settlor to avoid his own debts by the mere act of establishing a trust. The Cook Islands asset protection trust law has now been implemented in one form or another in 13 countries and eight U.S. states.

According to Jacob Stein's treatise on asset protection, common provisions enacted among some, but not all, of these countries are: (i) there is no recognition of foreign judgments with respect to trusts; (ii) there is a very short statute of limitations on fraudulent transfers; (iii) to establish a fraudulent transfer the creditor must show that the debtor was insolvent, and must establish the debtor's intent to "hinder, delay or defraud" beyond a reasonable doubt; (iv) the anti-duress provisions are incorporated into the statutes; and (v) spendthrift protection is extended to self-settled trusts. These jurisdictions also offer the additional advantages of (i) not being subject to the U.S. constitutional issues like the Full Faith and Credit clause; (ii) using the English common-law legal system; (iii) having abolished the rule against perpetuities; and (iv) not allowing trusts to be pierced for child or spousal support.

Cook Islands

The Cook Islands is an independent country joined in "free association" with New Zealand. While the Cook Islands has its own government and court system, it uses the New Zealand dollar as its functional currency, and its citizens carry New Zealand passports. It has a population of roughly 35,000, with more than half residing on its primary island, Rarotonga.

With a British common law tradition and English as the primary language, the Cook Islands has an active offshore banking sector attractive to Asians and North Americans. Major offshore-licensed banks in the Cook Islands include Australia and New Zealand Banking Group (ANZ) and Capital Security Bank. The confidentiality laws of the Cook Islands prohibit the disclosure of trust and banking relationships except with the consent of the customer, ensuring that no creditor or foreign government can gain access to bank or trust information except in cases of preventing money laundering or averting the financing of terrorism.

The Cook Islands was the first country to enact an explicit asset protection law, implementing particular provisions in 1989 to its International Trusts Act. Several of these changes have been adopted in one form or another in several other countries and a handful of a U.S. states. The most important of these changes permits the settlor of a trust to be named as a spendthrift beneficiary.

The trust laws of the Cook Islands provide a shortened statute of limitations on fraudulent transfer claims. While most U.S. states have a four year statute of limitations (and the Statute of Elizabeth in some common law jurisdictions has no statute of limitations), the general statute of limitations in the Cook Islands is reduced to two years for fraudulent transfers; in certain circumstances, it may be as short as one year. If the trust is funded while the settlor is solvent, then the transfer cannot be challenged (i.e., there is no time period for the creditor to challenge the transfer).

Several provisions of the Cook Islands law specify the form of pleading that a creditor must establish in order for its claim to be heard in a Cook Islands court. The effect of these provisions is to raise the burden of proof to "beyond a reasonable doubt," something akin to a criminal law standard, in order for a creditor to establish a fraudulent transfer. The "constructive" fraudulent transfer theories are eliminated under Cook Islands law, requiring the creditor to prove that the transfer was made with specific intent to avoid the creditor's claim.

It is believed that the Cook Islands now has more registered asset protection trusts than any other country. Along with a body of case law that has interpreted major provisions of its trust law, many lawyers find the Cook Islands to be the premier jurisdiction for asset protection planning. Recently enacted LLC legislation in the Cook Islands includes some asset protection features that are likely to keep the Cook Islands popular among asset protection attorneys.

Nevis

Nevis was one of the first countries to follow the Cook Islands, duplicating an older version of the Cook Islands law and naming it the Nevis International Exempt Trust Ordinance, 1994. One distinguishing feature of the Nevis legislation is that a creditor must post a bond of ECB 25,000 (roughly USD 13,000) to lodge a complaint against a trust registered in Nevis.

Very little case law exists in Nevis, which many attorneys interpret to mean that creditors are effectively deterred from bringing suit in Nevis. It has a small offshore banking industry, with St. Kitts-Nevis-Anguilla Bank and Bank of Nevis International as the only licensed offshore banks.

LLC legislation modeled after the Delaware LLC Act was passed in 1996. This has enabled Nevis to distinguish itself as a primary offshore jurisdiction for LLC formations, as opposed to other countries that are well known for IBC formations (British Virgin Islands) or trust formations (Cook Islands). A Nevis LLC is often used in conjunction with an asset protection trust because it gives the creator of the trust direct control over the assets if the creator is listed as the manager of the Nevis LLC. This gives the creator added security in that it keeps the assets one step removed from the trustee of the asset protection trust. Because the managers and members of a Nevis LLC are not public information, the creator of the trust is able to assume control over the assets without making disclosing his control on any public records.

Belize

Belize, for example, offers immediate protection from court action initiated by creditors which challenges the settlor’s transfer of property into the trust.[citation needed] However, due to the paucity of credible offshore banks in Belize, many trusts established in Belize hold assets with a second trustee or third-party financial institution in another country.

Bahamas

The Bahamas have traditionally been associated with offshore planning. However, the Bahamas are probably more noteworthy for offshore banking and IBC formations than for asset protection trusts. The Bahamas do not recognize self-settled spendthrift trusts, unlike the Cook Islands, Nevis, or Belize. For this reason, the Bahamas are not regarded as an asset-protection trust jurisdiction.

Channel Islands (Guernsey and Jersey)

The Channel Islands have captured the imagination of UK residents longing for offshore asset protection and safe havens to hide assets. However, modern case law indicates that creditors are routinely able to freeze trust assets in the Channel Islands. Furthermore, tax law initiatives in the UK have largely eliminated the tax advantages of placing assets in trust in the Channel Islands. While the Channel Islands enjoys a modern banking sector, most attorneys do not regard the Channel Islands as appropriate for asset protection planning.

Switzerland and Liechtenstein

Switzerland and Liechtenstein are noteworthy for large banking sectors and sophisticated wealth management services. While both countries now recognize trusts (particularly trusts established under the laws of another jurisdiction, such as Nevis), there is as of yet no available case law indicating how the courts of those two countries will enforce offshore asset protection trust laws.

Many attorneys establish asset protection trusts under the laws of another country and deposit the trust assets in Switzerland or Liechtenstein. One question raised by this approach is whether a creditor can seize assets in Switzerland or Liechtenstein without having to bring a claim in the trust-protective jurisdiction. Again, a lack of precedent suggests that this is an open issue in Switzerland and Liechtenstein.

Both countries are also known for offering asset protection annuities, with a six-month statute of limitations on fraudulent transfers into an annuity. Unfortunately for most Americans, these annuities cannot invest in US securities without punitive taxation due to the offshore status of the insurance carriers that offer these annuity products. Furthermore, many lawyers peddling these annuity products to their clients collect commissions from the insurance carriers. These reasons, among others, may help explain why annuities offered in these two countries are not particularly popular with U.S. persons. This does not mean that taxpayers of other jurisdictions may not significantly benefit from holding a Swiss or Liechtenstein annuity. Also, U.S. persons may benefit from holding an annuity issued by a carrier in an asset-protective jurisdiction (such as the Cook Islands), particularly if the carrier is an electing 953(d) carrier (a reference to a provision of US tax law).

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