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Structuring and administration of trusts including unit trusts, pension fund, asset protection trusts and purpose trusts

ASSET PROTECTION

Trusts can be used very effectively to protect assets. In simple terms, assets transferred to a trust no longer form part of the property owned by the settlor and therefore if the settlor experiences financial problems the trust assets cannot be grabbed by the creditors of the settlor. Those assets would therefore be protected if the settlor experienced financial difficulties due to bankruptcy, dissolution of marriage or a court award made as a result of, for example, a professional negligence claim. Thus, although the settlor may be declared insolvent a portion of his assets might be safeguarded by the trust structure and could therefore be used to maintain the family of the settlor otherwise. This premise is legally correct but is an over-simplification of the law. Under certain circumstances it is possible for an aggrieved creditor to have the transfer of the assets into trust set aside by showing that the settlor set up the trust with the intention of avoiding a current or future liability or because the relevant debt arose within a specified time after the transfer into trust. In effect, it has hitherto been difficult to know that the assets transferred into trust are completely safe from creditor attack. It was for this reason that many of the more astute offshore jurisdictions created what is generally referred to as the concept of the "asset protection trust" by initiating legislation which provides that as long as the transfer into trust is made at a time when the settlor does not have notice of any impending claim against those assets then as soon as the assets are correctly placed into trust they are absolutely safe from future attack. By choosing an offshore jurisdiction, which has initiated «asset protection legislation», it is possible to gain a degree of additional protection over and above the already considerable asset protection inherent in a normal trust structure. It is therefore important to set up the trust in an offshore jurisdiction, which has initiated such legislation in order to guarantee, the maximum security for the trust assets.