For generations, families have used foreign trusts to protect assets from creditors, relying on foreign law or the foreign legal climate, or a combination of both, to serve as a barrier between the creditor and family wealth. The Isle of Man developed a cottage industry in asset protection trusts after its courts, in the 1859 decision of Corlett v. Radcliffe, held that fraudulent transfer claims would be handled on a facts-and-circumstances basis and that future unanticipated creditors could not set aside a transfer in trust made when the debtor was solvent. Corlett v. Radcliffe was reaffirmed as recently as 1999 in the case of In re: Heginbotham, again affirming that transfers made when solvent cannot be set aside when the debtor later becomes insolvent.
Asset protection trust law in the Isle of Man is based on common law (i.e., “judge-made law”). Over the past 30 years, several countries as wells as American states have attempted to replicate the perceived certainty in trust planning in the Isle of Man. Jurisdictions such as the Cook Islands, Nevis, the Cayman Islands, and Anguilla have enacted trust laws meant to codify certain common law principles emanating from the Isle of Man, or to offer their own particular limitations on creditor claims. This inevitably leads to comparisons among jurisdictions as to which country has the better asset protection trust law.
In 1992, Belize contributed its own solution to the asset protection puzzle by enacting the Belize Asset Protection Trusts Act. Rather than copying the legislation of other asset protection trust jurisdictions, Belize staked out its own solution in collaboration with a panel of tax and estate planning experts in the U.S. and major law firms in England.
Changes made to Belize trust law have now made Belize the most formidable jurisdiction for asset protection trust planning. Furthermore, the approach that Belize took to develop an asset protection trust law differs greatly from the method used in several other jurisdictions. A careful understanding of why Belize took the approach that it did shows why Belize offers greater certainty under its trust law; it is why we admire Belize as the jurisdiction of choice for APT planning.
Fraudulent Transfer Law
First, it is important to understand how fraudulent transfer laws work, and how the asset protection trust has developed as a method for cutting off fraudulent transfer liability. The law of fraudulent conveyances developed in England as a set of statutes known as the Statute of 13 Elizabeth in 1571. At the behest of deep-pocketed banking interests, England’s Parliament enacted a law criminalizing fraudulent transfers, awarding half the value of the transfer to the creditor and the other half to the crown. English courts, however, chose instead to interpret the statute as providing a private remedy, giving the creditor the ability to ignore the transfer and proceed directly against the property. While English law evolved over the generations to eventually disband the practice of criminalizing fraudulent transfers, the pro-lender bias of the Statute of 13 Elizabeth persists in modern fraudulent conveyance law in many common law countries
At first, Belize did not have a fraudulent transfer law, only enacting one as part of its Law of Property Act in more modern times. As currently enacted, Section 149 of the Property Act provides as follows:
(1) Except as provided in this section, every transfer of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.
(2) This section shall not affect the operation of a disentailing assurance, or the law of bankruptcy for the time being in force.
(3) This section shall not extend to any estate or interest in property transferred for valuable consideration and in good faith or upon consideration and in good faith to any person not having, at the time of the transfer, notice of the intent to defraud creditors.
Paragraph (1) reflects the codification of a fraudulent transfer law and is limited to those transfers that are made with intent to defraud (note that constructive fraud, which exists in many known APT planning jurisdictions, is not included here). Paragraph (2) creates a carveout for bankruptcy proceedings, which are handled under another body of law. Paragraph (3) contains two exceptions to the fraudulent transfer law that are most analogous to the common law principles found in the Isle of Man: Both (i) transfers for valuable consideration, and (ii) transfers received by innocent parties in good faith, are excluded from the definition of a fraudulent transfer.
It is important to contrast this with the fraudulent transfer laws in other asset protection trust jurisdictions. In Belize, there is no codified list of the “badges” of fraud, and there is no statutory enactment of the Statute of 13 Elizabeth. Some well-known APT planning jurisdictions continue to enforce the Statute of 13 Elizabeth. Additionally, many jurisdictions perform a two-part test, looking at actual intent to defraud a creditor or constructive fraud based in part on the debtor’s net worth at the time of the transfer. While some jurisdictions provide an exception for transfers made at equivalent value, Belize provides even broader exceptions to protect innocent third parties (such as trustees) who receive transferred assets in good faith.
Belize Trusts Exempt from Fraudulent Transfer Law
A number of asset protection trust jurisdictions have tried to fine-tune the fraudulent transfer laws by creating a set of circumstances by which creditors may bring claims in the trust jurisdiction and, with the right facts, set aside such transfers. This has happened in several well-known asset protection trust jurisdictions, including the Cook Islands, where creditors have been able to freeze trust assets.
Belize has taken a different tack. Instead of fine-tuning the circumstances under which a creditor may be able to seize trust assets, Belize has instead decided to exclude the application of its narrow fraudulent transfer statute (Section 149 of the Law of Property Act) to trusts established in Belize. Section 7(6) of the Belize Trusts Act specifically states:
Where a trust is created under the law of Belize, the Court shall not vary it or set it aside or recognise the validity of any claim against the trust property pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect to –
(a) the personal and proprietary consequences of marriage or the termination of marriage;
(b) succession rights (whether testate or intestate) including the fixed shares of spouses or relatives; or
(c) the claims of creditors in an insolvency.
Section 7(7) of the Belize Trusts Act buttresses this by providing that:
Subsection (6) above shall have effect notwithstanding the provisions of section 149 of the Law of Property Act, section 43 of the Bankruptcy Act and the provisions of the Reciprocal Enforcement of Judgments Act.
Instead of limiting the period by which a creditor may bring a fraudulent transfer claim against a trust, the team of international lawyers drafting the Belize Asset Protection Trusts Act instead decided to preclude fraudulent transfer claims altogether. The practical effect of this approach is that even a debtor intending to avoid a known creditor may successfully protect assets in a Belize trust.
The Belize approach is different. Competing jurisdictions invariably argue that their approach, which is to sunset fraudulent transfer claims after a period of 2 to 6 years, is better than an outright ban on such claims. However, if your trust were attacked by creditors, would you want to risk the assets of your trust on what a judge in the foreign jurisdiction has to say about timing?
Those in competing trust jurisdictions may read Section 7(6) of the Belize Trusts Act and confuse “insolvency” with a bankruptcy proceeding, arguing that the protections afforded under Section 7(6) are piecemeal rather than complete. However, Section 7(7) has its own distinct reference to bankruptcy law, separate and apart from the narrow fraudulent transfer provisions of Section 149 of the Property Act. As many Belize lawyers have pointed out – and as the Supreme Court of Belize has consistently ruled – the effect of Section 7(6)(c) and 7(7) of the Belize Trusts Act is to preclude fraudulent transfer claims altogether. This is consistent with the commentary from those English lawyers who helped draft the Belize trust law to counter the effect of the Statute of 13 Elizabeth, which is, after all, an English statute.
The Belize courts have never set aside a Belize asset protection trust or disallowed a transfer into a Belize asset protection trust. The same cannot be said of other well-known asset protection trust jurisdictions, where a creditor can timely set aside any transfer in trust by pleading the right facts.
The Evolving Landscape for Asset Protection Trusts
Perhaps the most important consideration in a jurisdiction for your asset protection trust is the avenues of recourse that a creditor has to challenge your trust structure. We have previously observed that asset protection trusts have the potential to become the victim of their own success. As more and more jurisdictions enact APT laws, and as more families engage in asset protection planning to guard their wealth, we expect creditors and the judiciary to innovate and disrupt traditional APT planning practices.
One such line of attack used with offshore APTs is the Mareva injunction. Named after a famous 1975 ruling in the United Kingdom, Mareva Compania Naviera SA v International Bulkcarriers SA, 2 Lloyd’s Rep. 509 (1975), the Mareva injunction is a form of “temporary restraining order” that freezes trust assets pending the outcome of a trial. The Mareva injunction permits a creditor to obtain a court order freezing assets of an asset protection trust. Once the trust assets are frozen, the trustee and the trust settlor often do not have the financial resources to challenge the creditor’s action in court, meaning that the creditor has won the war without ever having to go to battle. Therefore, it is important to consider whether the jurisdiction used for APT planning entertains Mareva injunction requests.
An increasing number of common law jurisdictions recognize the Mareva injunction, including the Cook Islands. In one notorious case, Bank of America v. Brian Weese et al, Case No. 03-C-01-001892 (Cir. Ct. Baltimore County) (2001) (related U.S. proceedings), a bank lender successfully froze the assets of a Cook Islands trust that had been settled by a solvent debtor after litigation had ensued in the U.S. but before judgment had been issued. Unfortunately, the Cook Islands High Court has issued a number of Mareva injunctions against Cook Islands APTs; one explanation offered is that most of the judges serving in these cases come from New Zealand and arguably do not share any sympathy for Cook Islands APTs.
While some common law APT jurisdictions such as Nevis have considered and then curtailed Mareva injunctions against their own trusts, Belize has instead precluded this risk by eliminating the creditor remedy altogether. In SEC vs. Swiss Trade and Commerce Trust, Ltd., Banner Fund International, Lloyd Winburn et al. (Belize Sup. Ct. 1994), the Belize Supreme Court confirmed this, ruling that the asset protection features of the Belize Trusts Act preclude creditor requests for Mareva injunctions. Settlors who choose Belize as the jurisdiction for their asset protection trust therefore have the assurance that trust assets would be available to fend off litigation. More importantly, the Belize Supreme Court has assured trust settlors that Belize trust law precludes fraudulent transfer claims altogether.
Trading Creditor Risk for Jurisdictional Risk
The typical offshore asset protection trust jurisdiction offers a small population, little to no credible offshore banking services, certainly no deposit insurance, and no ability to harbor the assets of a trust. While the jurisdiction may offer favorable asset protection trust laws, the settlor ends up swapping one problem (potential creditors) for another (potential loss of assets).
To understand this concern, consider again the Cook Islands. It has a population of roughly 30,000 people, no central bank, and a median income of less than US $6,000. After experimenting with its own currency many years ago, the country went bankrupt. The country is so poor as to depend on New Zealand for financial assistance. The Cook Islands even relies on New Zealand judges to adjudicate its cases, which is perhaps why the Cook Islands High Court has set aside more APTs than most other popular APT jurisdictions. If a trustee or banker ran off with the assets of an APT or was rendered insolvent by a commercial claim, the Cook Islands would be helpless to finance a bailout.
By comparison, Belize has a gross national product of almost US $1.5 billion, and a population of approximately 350,000. Belize has its own central bank and currency, which is pegged to the U.S. dollar, and the country hosts several large international banks in addition to a vibrant domestic banking sector. Tourism and a magnetic real estate market draw investors from around the world, including some of the wealthiest American families.
Most importantly, Belize has oil, and lots of it. We have seen the importance of oil in geopolitics and international security. A country with oil sets its own destiny, and for Belize that destiny includes its international trust and LLC industry.
Beware the Paper Trust
In evaluating a suitable jurisdiction for an asset protection trust, it is not enough to look to the trust law alone. One must evaluate the jurisdiction itself, its government, its legal system and past jurisprudence, its banking sector and financial infrastructure, its national wealth and natural resources, and its proximity to international financial centers. Oftentimes, jurisdictions that are historically known for serving as havens for asset protection trusts are utterly devoid of the capability to custody trust assets. While no one factor is determinative of the “best” jurisdiction for asset protection planning, financial infrastructure is of utmost concern.
A trust that is formed on paper and never properly funded is often described in the asset protection trust industry as a “paper trust.” In its more technical aspect, this term describes a set of facts in which a trust settlor has spent considerable sums of money to establish a trust in a jurisdiction that is simply incapable of procuring custody of the trust assets in a manner that is consistent with the asset protection trust laws of the selected jurisdiction. A settlor may set up a trust under the laws of a popular asset protection trust jurisdiction only to learn later (sometimes, in the course of litigation) that the assets are nowhere to be found in the trust jurisdiction, nor is the trustee licensed or qualified to hold such assets in the trust jurisdiction. The problem becomes particularly acute if the assets consist of U.S. Dollar deposits or listed securities which can be seized without the creditor having to bother with a foreign court proceeding.
The discerning creditor knows how to pick apart a paper trust and seize the assets. At commercial litigation conferences, attacking APTs – both domestic and offshore – is a popular topic, and many lawyers offer their skills and experience to guide creditors in pursuing APT assets. The competent asset protection plan should take into account the practical ability of the foreign trustee to gain custody of trust assets and properly situate them in the trust jurisdiction. If this cannot be done, the jurisdiction for the trust should be reconsidered.
The Lighthouse Approach to Asset Protection Planning
At Lighthouse, we are known for a set of principles that guide us in asset protection planning. Two of those principles are:
- No asset protection jurisdiction is necessarily superior to another; each jurisdiction has its own comparative advantages and disadvantages.
- No single asset protection planning technique is appropriate for all forms of assets; different assets require different solutions.
In evaluating the suitable jurisdictions for asset protection trusts, we consider a number of factors, including several mentioned throughout this article. We are not beholden to a single jurisdiction but offer our clients the freedom and flexibility to select the jurisdiction that works best for them, including those in which Lighthouse is a licensed trustee and those in which Lighthouse affiliates with qualified local trustees that meet our extensive due diligence requirements.
Marketing representatives for competing trust jurisdictions may quibble over who has the best asset protection trust law or who has the best approach to foreclosing the claims of unanticipated creditors. However, as we have observed throughout this article, hope and reality are discrete concepts. Some of the better-known APT jurisdictions have glaring vulnerabilities, whether in entertaining creditor requests for assets freezes or a patent inability to protect trust settlors from fraud and financial mismanagement.
We think our jurisdictional independence permits us to credibly observe that the Republic of Belize offers the best combination of (i) a comprehensive asset protection trust law that effectively bars creditor claims, (ii) a healthy local economy, and (iii) an independent judiciary that is protective of its asset protection trust and LLC industry. With two decades of successful trust practice in Belize and not a single adverse case in all of that time, we expect the future for the Belize trust industry to hold plenty of promise.