Trusts and other asset protection vehicles
It is an unfortunate fact of life that people can go broke or lose money for all sorts of reasons.
- Banks may introduce a credit squeeze as a reaction to a domestic or international credit bubble.
- A head contractor may collapse leaving your business suddenly short of cash flow and forced into insolvency.
- An insurer may refuse to cover a claim against you.
- A spouse may seek division of assets in divorce proceedings.
- An anticipated inheritance may be threatened by a family provision claim.
What can you do?
In many cases, it may be too late. There are common law and statutory prohibitions which can set aside preferential transfers or fraudulent conveyances. You cannot go hiding assets after your creditors or claimants are filing against you in Court. Any attempt to do so may not only be unwound but constitute an offence.
However, not every transfer may be voidable, nor every asset seizable, by creditors or claimants. Superannuation or pension fund accounts and life insurance assets are given special protection in many countries. Transfers made to spouses in a family law settlement may prevail against creditors
Asset protection is about protecting assets long before any such disaster occurs. Like insurance, it is something you put in place before, not after, you know you really need it.
Discretionary trusts and “asset prtection trusts”
Asset protection vehicles include discretionary trusts, which may be located within your own country or somewhere else. The basic principle of a discretionary trust is that, although you or your family may benefit from the trust, its assets are not your assets and cannot be seized to pay your debts – your benefits are at the discretion of the trustee and can be stopped.
Care may need to be taken to ensure that the trust is not treated as your “alter ego” or that transfers to the trust are not able to be set aside.
Some countries have passed laws to ensure that transfers to “asset protection trusts” cannot be challenged after a given period. While such laws may not always be respected outside that country, it may be possible to ensure the relevant protected asset is within that country’s jurisdiction.
People have often used family companies to control assets without owning the assets. They have then tried to make sure that if creditors try to seize their shares, the shares may become worthless because of pre-emptive or other rights exercisable by the other shareholders.
A pension from a superannuation fund may also provide protection, as it may be unable to be seized by creditors under statute or by the nature of its grant.
Partnership assets can be shielded from creditors to some extent as they are only answerable for the debts of the partnership, not the private debts of the partners. A charging order against a bankrupt partner’s interest may not be very effective for a creditor if the other partners are in a position to cut off or limit distributions to the bankrupt partner.
Conclusion – asset protection
Asset protection is not about cheating creditors. Proper asset protection is about putting away for a rainy day. So long as you have surplus assets and no looming claims, you are largely free to plan the disposal of your assets in such a way as to ensure they will always be available to benefit you or your family.