Blog » Notes on US Based Asset Protection Trusts

The following notes are not meant to be comprehensive with respect to Asset Protection planning.

After considering what Asset Protection provisions exist in the jurisdiction of residence; Asset Protection laws in other jurisdictions can be considered; most of the notes below address the US Asset Protection Trusts.

Several US Jurisdictions (Nevada, Wyoming, Alaska and others) have passed Trust legislation that provides for the following:

1. Self Settled Trusts are permitted- a debtor can essentially transfer his property to a Nevada Trust and have himself as a beneficiary of the Trust;
2. Nevada Fraudulent Conveyance law significantly limits the circumstances under which such a transfer can be contested;
3. An insolvent Debtor’s personal assets in Canada would be subject to Creditor’s claims; however Debtor’s beneficial interest in the Nevada Trust would not be (under Nevada Law);

Consider possible causes of Action in Tort by Creditor (Against Foreign Entity/Trustee)

If due diligence is conducted, and the following conditions are met: transferor retains sufficient assets to service existing debt, the transfer does not breech any existing contract to which the debtor is a party, and no circumstances exist that suggest the financial condition of the debtor is expected to deteriorate; then the probability of a tort claimants success will be low. Any tort claimant at the time of the transfer would be unascertainable, a future creditor whose claim arises out of future unplanned activities of the debtor.

A Criminal Act or Intentional Tort (like Conspiracy) would require a currently ascertainable claim / creditor and high likelihood (probability) of injury to such claimant due to a transfer of assets to a non resident Trust.

In the event the Trustee fails to conduct a thorough due diligence of the debtor’s financial circumstances, there is the risk of an action in negligence.

FRAUDULENT CONVEYANCE LAW

See Genereux Case – at the time of settlement debtor had income and prospects of future income sufficient to meet current and anticipated liabilities – Court : nothing to prevent a person from reordering his affairs to isolate his personal assets from future creditors as opposed to present liabilities to creditors provided it is not established that the settlor had reason to believe at the time of the settlement that his creditors at the time or in the near future would due to a specific risky enterprise be looking to the settled assets to satisfy their claims

Fraudulent Conveyance

• is directed against transfers made by the debtor (US) made with actual intent to hinder /delay, and uses of badges of fraud to identify intent; remedies include judgement and appointment of receiver – could use corporate contributor be used to set up retirement type trust for key employees/ owners ?
• there is an intent that will be imputed to debtor to hinder / delay creditors when an entity/jurisdiction is sought out for the strength of its asset protection law;
• FC statutes breadth beyond the application of the relevant torts – many FC statutes extend to future creditors some of whom may not be reasonably foreseeable – the scope of a Tort claim is much narrower, particularly when applied to an independent trustee to the point where reasonable due diligence by trustee would be an effective defense to any tort;
• Fraudulent Conveyance – key is a legitimate good faith purpose other than asset protection and asset protection features that are consistent with that legitimate purpose; the focus is the debtor’s intent and the likelihood that a transfer will hinder or delay creditors is one factor that is relevant to intent;
• best to have a legitimate estate planning purpose for the selection of any particular jurisdiction ; for example the selection of a Florida LLC or LP to hold Florida real estate has a legitimate estate planning purpose;

Proprietary Interest in Property Transferred

• if Creditor can claim a property interest in the assets conveyed to a Foreign Trust ; creditor can follow that property interest into hands of Trustee / LP and Creditor does not need to rely on fraudulent conveyance statute ; to terminate that property interest a sale to a bona fied purchaser for value is required
• Debtor must ensure that funds transferred are entirely his own and that no proprietary claim can be made;
• In Ontario a spouse has no interest in the specific property of the other spouse until the marriage breakdown;
• A Creditor could claim a proprietary interest in transferred property via a constructive trust or equitable lien; these would arise out of (for example) a breech by transferor of some equitable duty with respect to the property transferred; like a fiduciary duty;-
• See Rule 45 Civil Procedure; Section 12 Assignments and Preferences Act – allows tracing of proceeds of property fraudulently conveyed and imposes a constructive trust on such proceeds; subject to Rule 45 seizure
• Family Law; assets retained by debtor should provide for family law support claims; a Canadian Court will simply impute income from a beneficial interest in trust. The court will first look to recover from Canadian sources of income and assets; revoke license/passport etc.; and then then look to remedies that may exist via a foreign trustee; Settlement of Foreign Trust should be consistent with any Domestic contract;
• Limitation Period: in Ontario – 2 years from time of discovery of the injury/loss or damage; that will require unsatisfied judgment of Creditor ; and knowledge of the transfer. So a conveyance remains open indefinitely until discovered by creditor;
• under Ontario law there are limited circumstances in which a transfer to a Foreign asset protection trust could not be challenged under Ontario Fraudulent Conveyance law;
• This raises the issue of Jurisdiction of an Ontario court over a Foreign Trustee;

Canada’s Jurisdiction

Canada’s jurisdiction is broad, the focus is the connection between the facts that give rise to the cause of action and Canada. If the connection is sufficient, the Canadian court will have jurisdiction over all the parties connected with the action. This is in spite of the fact that the connection of a particular party with Canada may be nominal. In circumstances like this, a Canadian court will take jurisdiction of the matter, and personal jurisdiction over the foreign Trustee. Accordingly, a Canadian judgement against the foreign Trustee is possible. Contrast this with the US where the defendant’s connection with the jurisdiction is the focus of the test and jurisdiction over a foreign trustee would be an important preliminary issue to determine.

Enforcement of CDN Judgment on Foreign Trustee

• assume a Canadian resident settles a Nevada Trust; a Canadian court takes jurisdiction and a Canadian judgement issues against the foreign Nevada Trustee;
• a non monetary judgement from Canada will not be not be enforced in the US; (ie court orders US trustee to reconvey property to Canada, or that US trustee holds property in trust for creditors) the foreign money judgements act does not provide for such orders, and there is no basis in common law for recognition of such an order, court orders of this nature are generally viewed as an inappropriate interference in US sovereign authority;
• US court will not recognize a foreign judgement unless the foreign court had personal jurisdiction over the Nevada Trustee; the US court will look to its own jurisdictional rules to determine whether jurisdiction over the Nevada trustee existed;
• Facts that would support jurisdiction over the Nevada Trustee; would include the Nevada Trustee carrying on business in Canada or acts of the Nevada Trustee in Canada to solicit trust business in Canada;
• Failing these facts; if the contacts between the Canadian Resident and Nevada trustee occurred solely in the US; jurisdiction would not exist over the Nevada trustee absent the Nevada trustee being complicit in a Tort committed by the Canadian Debtor;
• Note that if the Trustee is a legal entity; it’s only the acts of agents acting for the entity that matter (or persons acting at their direction) that are acting within the scope of their agency;
• In all probability the Nevada Trustee (assuming it accepts business from Non Residents) will be organized and conduct its business in a manner that minimizes its contacts with other jurisdiction’s (including other states);
• Generally it would be possible to structure the settlement of a Nevada Trust in a way that any Canadian judgement against the Trustee would not be enforceable;
• Also see Nevada statute that gives Nevada courts exclusive jurisdiction over issues related to the attachment or levy upon a beneficiary’s interest in a spendthrift Nevada trust – and direction of non enforcement of foreign judgement against Trustee if proceedings against the Nevada Trustee could not be brought in due to Nevada Statute of Limitations;

Other Options to Enforce CDN Judgement

• When enforcing judgements; information as to the nature and location of the debtors assets usually comes from the debtor by way of an examination of the debtor under oath, post judgement;
• Unlike land, there is no central registry that can be searched to determine where the debtor may have a bank or brokerage account; should the debtor refuse to disclose his or her assets; the debtor can be found in contempt of court;
• one option is to try to enforce Canadian judgment in other jurisdictions where trust assets are being held. In the case of a Nevada Trust, the Trust will hold its accounts in Nevada and this won’t be an option;
• Many Caribbean asset protection jurisdictions like the Cook Islands lack adequate banking and investment facilities. Trust assets are often held in other jurisdictions;
• Generally speaking, the existence of a debtor’s assets in a Jurisdiction (ie the Cayman Islands) is not a basis for personal jurisdiction over a foreign Trustee that resides in the Cook Islands. So for example, bringing a Tort proceeding in the Cayman islands against a Cook Islands trustee that arises out of a Canadian debtor’s transfer of assets to a cook islands trust will not be possible;
• However, proceedings to enforce a Canadian judgement by seizing assets owned the foreign trustee in a jurisdiction is possible. Information could be acquired from debtor through proceedings in Canada as to nature and location of Trust assets. In this case, Creditor would need to know the financial institution in which trust assets were being held and the name in which they were being held (ie they could be held in the name of a Nominee).
• -Most Foreign (non US) Trusts are set up with the Settlor / Debtor retaining control of Trust assets (via a Corporation whose shares are held by the Trust with the Debtor acting as the Director of the Corporation). The debtor will often know precisely where trust assets are located; and will likely have copies of bank / brokerage account statements that hold Corporate / Trust funds. In this case; the Canadian judgement must pass the jurisdiction test discussed above; with respect to the Jurisdiction in which the assets are located.
• Assuming the Trust assets are held in the Caymans, Caribbean jurisdictions generally follow English common law concepts of Jurisdiction which are based on Domicile. For the Cayman’s to enforce the Canadian judgement, the Cook Islands foreign trustee will have had to be domiciled in Canada. Domicile generally requires that the Foreign Trustee be conducting business out of an office in Canada, which is unlikely. ( These would be Proceedings in Aid of Execution):
• Another option is an injunction in aid of the proceedings in Canada. In the course of proceeding brought in Canada against the foreign trustee (based on Fraudulent Conveyance) an ancillary proceeding could be brought in the Caymans for an injunction freezing the assets held by the Corporation (ie prior to those assets being relocated by the Foreign Trustee). Once again, Canada’s jurisdiction over the Foreign Trustee would be an issue;
• Another option is to obtain a Canadian Court order compelling the debtor / Director to return the assets transferred to the Foreign Trust. However, at this point the Foreign Trustee will likely have removed the Debtor from his position as Corporate Director; and relocated the funds to an account held directly by the Foreign Trustee. In this instance; proceedings could be brought in the Cook Islands (for example) against the Foreign Trustee. However the laws of Asset Protection jurisdictions like the Cook Islands will invariably result in the Creditor losing; and as a consequence there will be no mechanism available to compel disclosure as to the location of the Trust’s Assets. In fact; there is no case law wherein a Foreign Trustee in a Carribean asset protection jurisidiction has been compelled to disgorge assets held in Trust
• the most likely avenue of success is to get the Canadian court to order the debtor to return the funds that are held in the foreign trust. This order would be based on the debtor retaining control over the funds held in trust (via a trust owned corporation) or on a finding that the whole foreign trust arrangement is a sham. (See US Case Law) The Failure of the debtor to comply could lead to a finding of contempt, which in turn would lead to fines and possibly imprisonment. ( see law on Contempt of Court) US courts have been willing to find that the foreign trust arrangement is a sham, and debtors have been imprisoned on this basis. (review Canada Contempt Law) Proceedings of this nature put the debtor in the difficult circumstances of permitting a Foreign Trustee to have direct control over the funds and risking fines / incarceration that could arise from a finding of contempt;
• another option would be to bring an action in Canada against key individuals associated with the Foreign Trustee in the hopes that these individuals would be more susceptible to a Canadian judgement issued against them. However, this action would likely have to be - based in an intentional tort like fraud or alleged criminal activity;
• another option would be to petition the debtor into bankruptcy in Canada; and then bring ancillary bankruptcy proceedings in the US in aid of the Canada proceedings (see more below)

Proceedings in the US

The creditor has the option of bringing proceedings in the US.

Nevada State Court

• See the Nevada Trust Law included below; Nevada Court will apply Nevada asset protection law and the Creditor has a high probability of loosing;

Bring Fraudulent Conveyance and Tort Claims against Nevada trustee in Federal Court

• Diversity jurisdiction exists if the creditor is not a resident of Nevada and this would be the basis for bringing proceedings in federal court; any civil action (75000) foreign citizen v. US citizen;
• The goal would be the application of Federal Choice of Law Rules which have been held to be procedural in nature; in this case (see below) the Federal court could (for example) apply Ontario Fraudulent Conveyance laws to the transfer as opposed to Nevada Law;
• Note a Limited Partnership will be considered to be a citizen of each of the limited partners citizenship ( Johnson v. Columbia 437 F.3d. 894); therefore a LP with Canadian citizens could be be considered to be citizen of Canada
• If there are foreign citizens on both sides of the litigation there should be no federal diversity jurisdiction (Ed & Fred Inc. v. Puritan Marine Ins. 506 F.2d. 757 : note that the presence of a US citizen plaintiff would create federal jurisdiction

US Bankruptcy Court

• option for Creditor in Canada to bring Chapter 7 Bankruptcy proceeding in Nevada (Federal Bankruptcy Court) against the Canadian debtor; (Petition the Debtor into Bankruptcy);
• See Section 109 Bankruptcy Act, a debtor includes anyone with property in the United States and Section 548 Fraudulent Transfers. A Cdn debtor with property in the United States (ie an equitable interest in self settled US trust) is subject to 548 (e) and the 10 year look back rule for US trusts;
• any conveyance to a US trust with actual intent to hinder or delay creditors can be reversed under Bankruptcy law - note it must be transfer to a self settled trust or similar device; must be a transfer of interest of debtor in property made within 10 years of petition of bankruptcy; debtor must be beneficiary of trust ; and actual intent to hinder or delay creditors
• goal of creditor – 1) To overcome state asset protection restrictions on creditors rights to seize trust assets 2). Federal Common Law Choice of Law Rules will apply (see below) and (for example) Ontario fraudulent conveyance law could apply to the Trust settlement; could (Federal common law Choice of Law Rules – 2 ^nd Restatement) 3. Utilize Bankruptcy Fraudulent Conveyance provisions to reverse the transfer to the Nevada Trust, Bankruptcy FC provisions will be significantly broader in scope than state law restrictions; (see Section 548/544 (b))
• In US Bankruptcy support claims have priority (over other unsecured claims) and property division claims would also have priority (for those creditors able to assert a proprietary interest;
• the key limitation on Creditors ability to petition Debtor into Bankruptcy is that other Creditors of the Debtor must join in the petition and the Creditors claim must be liquidated, meaning the amount of the claim must be ascertainable. For example, a Tort claimant would have to obtain judgement against the debtor first prior to bring bringing a petition in Bankruptcy

CHOICE OF LAW (FEDERAL)

For: Fraudulent Conveyance Statutes – significant differences exist between jurisdictions; particularly asset protection jurisdictions like Nevada; the application of Ontario FC Law would favor the creditor

• Other choice of Law issues; include whose Tort Law would apply to govern lawsuits against a non resident trustee; Limitation Periods; whose law governs the Trust itself;

• US – if action must be brought in the Asset Protection State, that State will have an interest in ensuring its AP Trust law is upheld and apply state law to all issues relevant to the transfer and validity of the trust; see Nevada, where the application of the Nevada FC statute is mandated by law if the transfer is to a spendthrift trust;

• Federal / Bankruptcy Choice of Law
• 1 ^st Restatement – law of situs of asset will govern issues that determine whether Creditor can claim a proprietary interest in the trust assets (states have an interest in determining who owns what property that is located in the jurisdiction)
• 2 ^nd Restatement – real property assets, then general rule is apply the FC rule of the situs of property applies;
• 2 ^nd Restatement – intangibles – fraudulent conveyance treated as a tort – law of the state with the most significant relationship to the occurrence and to the parties; Relevant Factors: place where injury occurred, where the conduct that caused the injury occurred, residence of parties, place where the relationship of parties is centered etc.
• There is also the possibility that court could apply law of debtor’s residency on basis that debtor should not be permitted to escape it’s application
• Statute of Limitations: generally procedural in nature so forum can apply it’s own limitations period (Nevada) to causes of action

Conclusions US Asset Protection Trusts

US estate planners often espouse the use of state APT trusts in circumstances where the debtor and creditors reside in the APT jurisdiction (like Nevada) which would avoid Federal Court diversity jurisdiction. A creditor will be precluded from accessing Bankruptcy court when the claim is unliquidated (ie tort type claim) until such time as creditor obtains judgement for specific amount and collection efforts under state law are ineffective. In circumstances where the creditor has loaned money to the debtor, the creditor should have access to Bankruptcy courts once debt is unpaid. US estate planners often suggest that creditors will be reluctant to petition debtor into bankruptcy, principally due to cost considerations. For a non US resident; Bankruptcy and Diversity Jurisdiction in Federal Court create significant risks for a US based APT.

See below legislation related to Nevada AP Trusts which at first review appear to provide strong asset protection for Nevada Trusts.

ENFORCEMENT OF SUPPORT / PROPERTY DIVISION ORDERS IN THE US

• US AP Trusts frequently provide exceptions for support orders;
• treaties between Canada and the US grant recognition of support / property division orders from foreign states / countries;
• state law will often provide support orders with priority over other creditors and provide support creditors with remedies not given to other creditors;

DISCLAIMER: This document is written for general information only. It is not intended as legal advice or opinion.

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