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ASSET PROTECTION TRUSTS
A trust arises where a person (the "trustee") owns assets, but holds them not for his benefit but for the benefit of someone else (the "beneficiaries"). A trustee may buy and sell trust assets as if he were the absolute owner, but is accountable to the beneficiaries for his actions involving trust property. The trust property does not form part of the trustee's estate on death, nor is it available to the trustee's creditors. [Click here for a simple discussion of trusts] [Click here for a discussion of immigrant trusts]
An Asset Protection Trust ("APT") is a trust formed in a foreign jurisdiction which can be used to shelter an individual's current assets from the claims of future creditors. [Go here for discussion of the residence of a trust.] These trusts have been made possible by the enactment of special legislation in the foreign jurisdictions which restricts the rights of Canadian creditors or trustees in bankruptcy to use the "offshore" trust assets to settle claims against the debtor/bankrupt (the "Settlor") who gave the assets to the APT.
While an APT initially sounds very attractive it is important to consider the risks involved in establishing the trust. As well be discussed below, it is because of these risks of creating or using the trust when the individual is insolvent that many people believe that APTs are designed for people who do not need them. Often an APT is used where the individual would otherwise consider the use of a domestic trust as part of their estate planning.
2. SITUATIONS WHERE APTs ARE CONSIDERED
One of the objectives of estate or wealth planning is to preserve assets accumulated by the individual. A person may consider using an APT rather than a domestic trust in the following situations:
(a) the costs of liability insurance for professionals, directors, environmental matters, etc. may be excessive; or
(b) the settlor wishes to preserve assets from the risk of insolvency from potentially risky business ventures; or
(c) it is possible that a dependant or a spouse could make a claim against a Settlor's estate contrary to his/her express directions in a will or other testamentary document;
3. WHY AN APT?
In Canada laws have been enacted to prevent a person from disposing of his/her assets where there is a real or substantial risk of insolvency, or where the intention is to place the assets beyond the reach of creditors. Where a person does such a transfer for insufficient consideration, a subsequent creditor may apply to the courts to set aside the transfer and have the assets returned to the Settlor, at which time they are available for the creditor.
4. HOW DOES AN APT WORK
It is not possible to provide a lengthy discussion of the operation of an APT in this format. Very briefly, the creation and operation of an APT is made possible by the enactment of special legislation in the foreign jurisdictions where the trust is resident. The legislation provides that a transfer of property to a special trust in certain specific circumstances cannot be set aside by the creditors of the Settlor. Generally, the conveyance to the APT is not prohibited where the Settlor was not rendered insolvent as a result of the transfer. Depending upon the jurisdiction, there may be specific requirements for registration of the APT, the trustee or the conveyance, etc.
5. THE JURISDICTIONS
There are many countries which have enacted asset protection legislation: Bahamas, Belize, Cayman Islands, Cook Islands, Cyprus, Gibraltar, Mauritius and Turks & Caicos Islands.
6. FEATURES OF AN APT
The typical form of APT is a discretionary trust (with the Settlor as one of the beneficiaries). An APT often provides for accumulation of income during the term of the trust. It is very important that the trust be irrevocable, the assets be situate offshore, and that all persons having control of the assets be located offshore. The Settlor should not reserve for his/herself the power of to distribute trust capital or have the power to change the governing law/trustees/location of the APT.
7. THE RISKS
As one might expect, Canadian courts and legislators do not like the idea that people can avoid paying their creditors merely by moving their assets out of Canada. In order to prevent such avoidance, legislation has been enacted which is intended to prevent "Insolvent" people from transferring their assets in a fraudulent manner, or with the intention or effect of defeating or delaying creditors. It is safe to say that any person who transfers, or assists in the transfer of assets to an APT when the Settlor is insolvent faces the possibility of civil and criminal consequences. Accordingly, if there is any question of insolvency, extreme caution must be exercised. It is also recommended that an APT be considered where a domestic trust would otherwise be used as part of the estate plan.
This Article deals with complex issues in a brief manner, it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained herein. Although every reasonable effort has been made to insure the accuracy of the information contained in this publication, no individual or organization involved in either the preparation or distribution of this publication accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.