Asset Protection Trusts – Why The Recent Interest?

Background

So what precisely is an asset protection trust and what is it, over and above a normal trust that an asset protection trust is seeking to achieve? This paper considers these issues from a Jersey law perspective and fundamentally asks the question to what extent a Jersey trust, once established, will protect assets from creditor claims.

By way of background a trust exists under Jersey law where a person holds or has vested in him property for the benefit of another person known as a beneficiary (Article 2 of the Trusts (Jersey) Law 1984, as amended (TJL)). To this end a trust is a tripartite relationship between trustee, property and beneficiary which is consistent with the definition of a trust in most common law trust jurisdictions (to include the DIFC) and the Hague Convention on the law applicable to trusts and on their recognition.

Of course at the heart of any trust is the requirement for the trustee to safeguard trust assets. A trustee of a Jersey law trust has clear fiduciary duties in Article 21 of the TJL to act with due diligence, as would a prudent person, to the best of his ability and skill and to observe the utmost good faith. The draftsman of the TJL clearly had in mind the ordinary prudent man of business test in formulating a trustee's duty of care as a matter of Jersey law. In terms of investment, subject to the terms of the trust, to further preserve and enhance the value of the trust property. It follows that a trustee plainly has duties and responsibilities with regard to trust property in their care.

What is an asset protection trust?

It is fair to say that the term "asset protection trust" has developed as an informal description of a trust the primary purpose of which is to safeguard trust assets from claims made by creditors and others usually against the settlor or beneficiaries of a trust.

Jersey law does not have express asset protection legislation in the same way that other jurisdictions have adopted express legislation in this area. Other IFCs to include Anguilla, the Bahamas, the Cayman Islands, the Cook Islands and Nevis, amongst others, have brought into force debtor friendly legislation and could, on this basis, be described as "asset protection jurisdictions". The focus of this debtor friendly legislation, sometimes referred to as "fraudulent transfer legislation", is to restrict a creditor's ability to recover property held within a trust settled under its laws. Indeed the almost entire exclusion of rights of future creditors in much of this legislation has led to widespread debate and criticism from the international community.

In Jersey the issue of express asset protection legislation has been considered by...