“Asset protection” is a term used to describe legal planning that shields a client’s assets from the unanticipated claims of creditors. Asset protection planning employs any number of techniques in isolation or in conjunction to achieve this objective.
A competent asset protection plan assumes that, at some point in the future, the client may be in some form of legal jeopardy obligating the client to account to his creditor those assets that are within the client’s control. Therefore, most asset protection planning techniques incorporate the separation of client control from the assets being protected. The predominant theory is that what a client does not own or control cannot be delivered to the creditor.
The History of Asset Protection – Offshore Trusts
Offshore trusts became a popular form of asset protection planning in the early part of the 20th Century. The Isle of Man became well known as a jurisdiction offering a perceived degree of protection for trusts funded before a creditor’s claim arose.
Beginning in the late 1980s and extending into the 1990s, several offshore jurisdictions codified many of the Isle of Man common law principles to protect trust assets from the claims of creditors. Several jurisdictions went even further, invoking narrow statutes of limitations and imposing a high burden of proof on creditors seeking to set aside a fraudulent transfer. Asset protection trust laws would find a home in at least twelve “offshore” jurisdictions and at least as many U.S. states.
The Challenge with Asset Protection Trusts
Offshore asset protection trusts have enjoyed a successful track record since their inception under modern APT law in the late 1980s. 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, the California Court of Appeal for the 4th 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:
- The dissociation of ownership from control of LLC assets; and
- The limitation of creditor remedies to a charging order.
Dissociation of Ownership from Control of LLC Assets
In an LLC, there are members and there are managers. A member has rights of an owner of the LLC, much like a shareholder in a corporation. A manager, by contrast, has the rights and duties of a business manager.
A manager does not have any right to ownership of the LLC assets by virtue of his or her title as manager. Likewise, a member has no right to manage the affairs of the LLC unless the member is named as a manager. A client seeking to protect assets may contribute them to an LLC in exchange for a membership interest, while engaging someone else (such as a professional management company in an asset protective jurisdiction) to act as the manager of the LLC.
The Charging Order Remedy
Most LLC jurisdictions provide that a judgment creditor may obtain by court process a charging order in respect of a member’s interest in an LLC. These same statutes generally describe the charging order remedy in terms that are substantially identical to the rights of an assignee of a membership interest.
For example, a charging order may only permit the creditor to receive distributions otherwise destined for the member. In most jurisdictions, the creditor is not permitted to interfere with the LLC’s management or obtain direct recourse against the property of the LLC, much less compel a distribution.
In most states, the charging order is but one remedy available to a creditor pursuing a member’s interest in an LLC. Creditors also have other remedies at their disposal and, in several states, creditors have the option of foreclosing on the member’s LLC interest and potentially winding up the LLC.
Asset Protection Evolved: The Nevis LLC
Since 1995, Nevis has offered limited liability company legislation modeled after state LLC law. In 2015, Nevis amended its Limited Liability Company Ordinance. These changes confer fundamental asset protection benefits and help to distinguish Nevis LLC law from that found in most any other jurisdiction.
Charging Order is Exclusive Remedy of Creditor
A creditor may wish to go after a member’s assets by attaching his or her LLC membership interest. In practically all jurisdictions, a member’s LLC membership interest is regarded as personal property capable of being transferred (including to creditors).
Nevis law makes clear that a creditor or other assignee of an LLC membership interest has no right to participate in, or interfere with, the management of the LLC. Further, Section 43(3) of the Nevis Limited Liability Companies Ordinance, 2015 provides that the charging order is the exclusive remedy as against a debtor’s membership interest in a Nevis LLC.
Nevis law makes clear that the charging order only permits the creditor to receive distributions otherwise destined for the member. This helps ensure that the assets and affairs of the Belize LLC retain their integrity, free from interference by an outside creditor.
Three Year Sunset on Charging Orders
In an additional limitation to creditors, Nevis law provides that the charging order expires at the end of three years and cannot be renewed. Throughout this period, the debtor retains all rights of membership as if a charging order did not exist.
Members’ Capital Contributions & 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 43A of the Nevis Limited Liability Company Ordinance addresses this concern by requiring a judgment creditor to prove “beyond reasonable doubt” that:
- The property was transferred to the LLC by the member with the principal intent to defraud that particular creditor; and
- Such member was insolvent at the time of the transfer.
For purposes of determining the member’s solvency, the Ordinance looks to the fair market value of the member’s assets before and after the transfer to the LLC, taking into account the fair market value of the member’s LLC membership interest. If the value of the member’s assets exceeded the value of the creditor’s claim, then the transfer is deemed not to be fraudulent, even if the debtor acted with intent.
Even if a creditor is successful in proving these elements, 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. 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.
Limitations on Claims
The Nevis Limited Liability Company Ordinance deems LLC establishments and transfers made at the following times to not be fraudulent against a creditor:
- More than two years after the date the creditor’s cause of action first accrued;
- Within two years after the date the creditor’s cause of action first accrued if the creditor fails to bring a claim within one year of the establishment or transfer; or
- Anytime before the creditor’s cause of action first accrued.
The “sliding window” approach of a) and b), above, is modeled after trust legislation found in many countries. An important ambiguity raised by such an approach is that a creditor has as little as one year or as much as three years to bring a claim, depending on the timing of the LLC establishment or transfer.
Creditor Must Post Bond
The Nevis Limited Liability Company Ordinance contains a “poison pill” in the form of a requirement that every creditor, before bringing an action against any member of property, to post a bond of EC $100,000 with a financial institution in Nevis. The Nevis courts have the authority to apply the bond against costs awarded to the member or LLC.
Cook Islands Asset Protection Trusts versus Nevis LLCs
When comparing the effectiveness of a Nevis 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 1989. While this legislation has been surpassed with time by more protective trust laws passed in Belize and Nevis, the Cook Islands continues to serve as a useful measuring stick by which legislation in other jurisdictions may be compared.
When comparing the Cook Islands asset protection trust with the Nevis LLC, we find that the Nevis LLC offers several advantages:
|Cook Islands Trust
|How long does a creditor have to set aside a fraudulent transfer?
|Three-year sliding window
|Three-year sliding window
|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 EC $100,000.
|Are foreign judgments enforceable against the transferor or entity?
|Yes as against the settlor; no as against the trustee.
|Yes as against the member; no as against the LLC.
|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, which sunsets after three years; judgment against LLC and return of member’s property for a fraudulent transfer.
|Is the entity protected from a party acting under duress?
|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.
|Can a creditor obtain an order from the local court freezing the assets pending the outcome of a hearing?
|Is there a substantial non-asset-protective business purpose for transferring assets to the entity?
|No under U.S. law – Kilker v. Stillman.
|Yes; the Nevis LLC is popular as a tax-neutral, business-friendly device for holding an international portfolio of investment assets.
|Can the entity be used to transfer assets to family members at death?
|Can the client manage the assets of the entity?
|Must the client engage the services of a local fiduciary to manage the assets of the entity?
|May the entity gain access to Swiss banking facilities?
|Are valuation discounts available for transfers to family members?
The Nevis LLC offers a formidable level of protection for the following reasons:
- Fraudulent Transfer Claims Restricted: Creditors face a steep burden of proof in order to establish that a transfer to an LLC is fraudulent.
- Charging Order Exclusive Remedy: A creditor has no right to interfere in LLC management or reach LLC assets.
- Three-Year Sunset on Charging Orders: Even if a creditor successfully obtains a charging order, the charging order expires after three years and cannot be renewed.
- Creditor Bond Requirement: A creditor seeking to reach assets of a Nevis LLC must post a bond equal to EC $100,000.
 2012 WL 5902348 (Cal.App. 4 Dist., Unpublished, Nov. 26, 2012).
 See, e.g., 6 Del. Code § 18-703(a) (Delaware law on charging orders).
 See: 6 Del. Code § 18-703(e); BILLC Act § 57.
 But see Nevis Limited Liability Company Ordinance, 2015 (“NLLCO”) § 43(7)(a) (creditor does not become assignee of membership interest).
 NLLCO § 43(7).
 NLLCO § 43(3).
 NLLCO § 43(11).
 NLLCO § 43(9).
 NLLCO § 43A(1).
NLLCO § 43A(2).
 NLLCO § 43A(1)(b).
 NLLCO § 43A(6).
NLLCO § 43A(3) – (4).
 NLLCO § 43A(16).