If a paramount objective is to pass on one’s assets to his family members, then whilst there is no financial or insolvency pressure, a plausible solution is for the client to set up a trust with his family members as beneficiaries.
The settlement of assets into the trust should cross over a five-yearperiod to avoid any potential claw back; after that, the assets under the trust will not be subject to any creditor action whatsoever.
The consequences therefore mean that while the client is adjudicated bankrupt by his creditors, the exposure of his assets to creditors would be confined to those assets that are owned in his name. The substantial part of his property in trust (subject to the five-year rule) would be safeguarded and not available to his creditors.
Structuring the Asset Protection Trust
Such trusts must be irrevocable for obvious reasons. If a trust is revocable and the settlor owes money to his creditor, it will be within the settlor’s power to revoke the trust. Upon revocation of trust, the assets in trust revert back to the estate of the settlor.
For robustness of an asset protection trust, it is preferable that the settlor distances himself from the trust. If the settlor was also named as a beneficiary of the trust, he should not be sole beneficiary (or the sole beneficiary, the settlor’s spouse).
Creditors may under such circumstances challenge the validity of the trust on the grounds that the trust was a sham. If there is the office of protector in the trust, the role is best left to another person to be appointed.
If the settlor has reserved certain powers in the trust, that would come under close scrutiny in a creditor action. The reservation of powers by the settlor should generally be limited to the reservation of investments of the trust or the power to remove and appoint trustees.
Where settlor is beneficiary of the trust
Notwithstanding, a well-crafted trust deed would usually accommodate the settlor, if he was so minded to be a beneficiary of the trust, appoint himself as protector or reserve some powers in the trust. The real test is really whether there is a clear separation between the roles of the settlor and the trustees and with the latter alone having the dispositive powers of the trust.
There are after all good reasons for a settlor wanting to create a trust where he is himself a beneficiary in anticipation that someday he might become mentally incapacitated. The trustees should be left with the discretion to exercise trusteeship independently. It should not be acting or habitually only acting under direction by the settlor in any function of the trust.
Hence, for asset protection, the trust must stand up to scrutiny in a court of law in legal proceedings. Claimants to the trust assets will attempt to show that it was a sham trust.
To counter such attack, the administration of the trust must be supported with proper records, minutes and accounts to prove its genuineness. There must be proper discretionary exercise by the trustees of the trustees’ powers under the trust instrument. For these reasons, it is recommended that professional licensed trust companies be appointed as trustees to carry out and keep proper documentation of its trusteeship.
The following is an extract from PreceptsGroup Succession and Trust in Wealth Management, 4th Edition.
The book can be purchased here.
