An asset-protection trust is a term which covers a wide spectrum of legal structures. Any form of trust which provides for funds to be held on a discretionary basis falls within the category. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.
Whether such a trust is a Spendthrift trust on the U.S. model, a Protective trust on the Commonwealth model or another form of discretionary trust, it is more likely to be subject to challenge under the common law doctrine of sham or under specific statutory provisions if any person setting up the trust (or their spouse and their spouse in turn as in a reciprocal trust):
- can benefit under its provisions;
- is the person under risk financially;
- benefits (whether permitted or not) from the trust; or
- if the person setting up the trust is at risk financially, if bankruptcy or divorce occurs soon after the establishment of the trust.
Offshore Jurisdictions
Some offshore jurisdictions have short periods of statutory limitation, as short as a year in some cases, such as Nevis, which allegedly prevent claims against the trust. Nevis also requires a creditor to deposit $25,000 Nevis dollars (equal to $12,500 US Dollars) in the court registry to challenge a Nevis Trust. Others offer packaged "asset protection vehicles" which may involve a corporate vehicle or other form of legal entity rather than a trust to hold the property.
Offshore trusts and other asset protection vehicles typically do not prevent action against the individual concerned in his or her home country. Orders under divorce and creditor protection laws can typically be made against that individual notwithstanding the alleged independence of such trustees. Failure to make payment may be contempt of court and may lead to imprisonment.
It is important to note that there are rigorous US tax reporting requirements that apply to taxpayers who establish offshore trusts. While no additional tax is usually imposed, there will have to be full disclosure of all trust assets and activities on the U.S. contributor's tax returns, so confidentiality is usually not an advantage under these arrangements.
See also
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