The Belize LLC: Better Than an Asset Protection Trust

The following is a synopsis from our recent article, “Belize LLCs:  The Entity of Choice for Asset Protection.”  Please contact us if you would like to receive a copy of the full article.  The following is protected under copyright law and may only be reprinted with permission of Lighthouse Swiss Trust & Wealth Management GmbH.

The History of Asset Protection – Offshore Trusts

Offshore trusts became a popular form of asset protection planning in the early part of the 20^th Century, particular in jurisdictions such as the Isle of Man which offered a perceived degree of protection for trusts funded before a creditor’s claim arose.  In 1989, the Cook Islands became the first country in the world to offer explicit asset protection for trusts, invoking a two-year statute of limitations and a higher burden of proof for creditors seeking to set aside a fraudulent transfer.  The success of the Cook Islands law spread to, at last count, twelve other countries and at least as many U.S. states.

The Problem with Asset Protection Trusts

Offshore asset protection trusts have enjoyed a successful track record since the inception of the first few Cook Islands trusts.  At the same time, the growth in popularity of asset protection trusts, particularly domestic trusts established in jurisdictions such as Alaska and Nevada, have led to an increasing number of court challenges.

The inherent weakness with any asset protection trust is that transfers to a trust are, by their very nature, gratuitous transfers.  A creditor bringing a timely claim can set aside the transfer under the Uniform Fraudulent Transfer Act, the Federal Bankruptcy Act, and other Federal and state laws governing transfers for no consideration.  For this reason, we have always considered domestic asset protection trusts to be folly and have advocated that asset protection trusts only be established offshore.

Consistent with these concerns, one recent court ruling is likely to bring an early end to the use of domestic asset protection trusts as well as impact the popularity of offshore trusts.  In Kilker v. Stillman,[1] the California Court of Appeal for the 4^th District ruled that transfers made to a Nevada asset protection trust were per se fraudulent transfers in respect of a future creditor not anticipated at the time the trust was funded.  The court looked to the specific nature of the Nevada-based trust as an asset protection device to find that the trust settlor had the requisite actual intent to commit a fraudulent transfer under the Uniform Fraudulent Transfer Act.

Critics of the Kilker ruling cite the poor set of facts in that case.  Yet, the legal precedent established by Kilker is sweeping, potentially undermining long-standing asset protection structures implemented by California residents.  We would not be surprised to see other states follow the Kilker ruling.

Asset Protection Using LLCs

Limited liability companies (“LLCs”) have become popular asset protection planning devices in the United States and other jurisdictions for a variety of reasons.  There are two prominent features of an LLC most frequently cited as reasons for their asset protectiveness:

1. The dissociation of ownership from control of LLC assets; and

1. The limitation of creditor remedies to a charging order.

Asset Protection Evolved:  The Belize LLC

Belize sought to bring additional certainty to the use of LLCs in asset protection planning by helping to develop and implement the Belize International Limited Liability Companies Act in 2011.  The LLC Act is modeled after certain provisions of U.S. state LLC law, but with important modifications that distinguish Belize LLC law from any other jurisdiction.

Charging Order is Exclusive Remedy of Creditor

Section 36(3) of the Belize International Limited Liability Companies Act, 2011 provides that the charging order is the exclusive remedy as against a debtor’s membership interest in a Belize LLC.  Belize law makes clear that the charging order only permits the creditor to receive distributions otherwise destined for the member.[2] This helps ensure that the assets and affairs of the Belize LLC retain their integrity, free from interference by an outside creditor.

Duress Provisions

In a first for LLC law, the Belize LLC Act contains a definition of an “event of duress.”[3]  Borrowing from asset protection trust law, an event of duress under the Belize LLC Act may cause the management power of the LLC to shift to those managers who are not influenced by an event of duress.[4]

Members’ Capital Contributions Are Not Fraudulent Transfers

One concern with LLCs, particularly those used for asset protection planning, is that a creditor may sue an LLC in its own capacity as a fraudulent transferee of assets from the judgment debtor-member.  Section 37 of the Belize LLC Act addresses this concern by requiring a judgment creditor to prove three elements of a fraudulent transfer “beyond a reasonable doubt…”[5] These three elements are:

a)    The property was transferred to the LLC by the member with the intent to defraud that particular judgment creditor;

b)    Such member has not provided any legitimate purpose for the transfer; and

c)    Such member was insolvent at the time of the transfer.[6]

Even if a creditor is successful in proving these elements to the statutory threshold, the creditor cannot void the transfer.  Instead, the LLC is liable to the extent of the interest the judgment debtor-member had in the property before the transfer.[7]  Moreover, the creditor’s right to recovery is limited to the property transferred and its proceeds; the creditor has no right of action against any other property of the LLC or any other member.[8]

In an important limitation, Section 37(8) of the Belize LLC Act defines a “transfer” to include any conveyance or disposition, including a settlement or contribution.  However, the defined term specifically excludes any transfer made in exchange for a capital interest in an LLC. This means that assets contributed by a member to the capital of a Belize LLC are protected from any claim of a fraudulent transfer whatsoever.

Statute of Limitations on Claims

 The Belize LLC Act bars a creditor from bringing a fraudulent transfer claim against an LLC after the earlier of (i) two (2) years from the date of the transfer and (ii) one (1) year from the date the LLC was first formed.[9]  This is a powerful bar against creditor claims, particularly because a judgment debtor may fund an LLC capital contribution through a fraudulent transfer with impunity after the one-year anniversary date of the LLC’s formation.

Creditor Must Post Bond

 The Belize LLC Act contains one of the most powerful “poison pills” in LLC legislation worldwide.  Section 37(7) of the Act requires every creditor, before bringing an action against “any limited liability company property…,” to deposit an amount equal to the greater of (i) one half of the amount claimed and (ii) $50,000, whichever is greater.

Non-Recognition of Foreign Judgments

Under Section 38(1) of the Belize LLC Act, only judgments issued by a court in Belize are enforceable against a Belize LLC.

Cook Islands Asset Protection Trusts versus Belize LLCs

When comparing the effectiveness of a Belize LLC with an asset protection trust, one jurisdiction providing a useful comparison is the Cook Islands.  The Cook Islands are known for their groundbreaking asset protection trust law from the 1980s.  When comparing the Cook Islands asset protection trust with the Belize LLC, we find the Belize LLC to present the more compelling case for asset protection:

	Cook Islands Trust	Belize LLC	Advantage
How long does a creditor have to set aside a fraudulent transfer?	2 years from date of last asset transfer	Capital contributions cannot be challenged as fraudulent transfers; 1 year from LLC formation for all other transfers.	Belize
Must a creditor post a bond in order to sue the entity in local court?	No bond is explicitly required, but a court may request a bond.	Yes – the creditor must post a bond of 50% of the amount claimed or $50,000, whichever is greater.	Belize
Are foreign judgments enforceable against the transferor or entity?	Yes as against the settlor; no as against the trustee.	No as against the member; no as against the LLC.	Belize
What remedies may a creditor obtain against the entity?	Judgment against the trustee for a fraudulent transfer; return of trust property.	Charging order only as against the member; the creditor cannot sue the LLC on a capital contribution.	Belize
Is the entity protected from a party acting under duress?	Yes	Yes	–
Are transfers to the entity per se fraudulent under the Uniform Fraudulent Transfer Act or Federal Bankruptcy Law?	Yes under U.S. law – Kilker v. Stillman; not necessarily under Cook Islands law.	No	Belize
Can a creditor obtain an order from the local court freezing the assets pending the outcome of a hearing?	Yes	No	Belize
Is there a substantial non-asset-protective business purpose for transferring assets to the entity?	No under U.S. law – Kilker v. Stillman; not relevant under Cook Islands law.	Yes; the Belize LLC is fast becoming popular as a tax-neutral, business-friendly device for holding an international portfolio of investment assets.	Belize
Can the entity be used to transfer assets to family members at death?	Yes	Yes	–
Can the client manage the assets of the entity?	No	Yes	Belize
Must the client engage the services of a local fiduciary to manage the assets of the entity?	Yes	No	Belize
May the entity gain access to Swiss banking facilities?	Yes	Yes	–