Asset Protection

3.1 The simplest type of Creditor Protection Planning involves nothing more complex than Transferring assets out of one's name, and placing them in someone else's hands and name.  Such a Transfer is usually gratuitous and without any consideration. 

3.2 As a first level solution, a Transfer of assets to a spouse is quite common.  But this may be an unsatisfactory approach for a number of reasons.  These include perceived or actual loss of control in a relationship, and the ever-present possibility of marital dispute. 

3.3 Thus, wherever possible, it is more appropriate to Transfer assets to a neutral third party, such as a Trustee, who is independent and can be relied on in the future.  A Trust Agreement can be drawn up to confirm and regulate the arrangement. 

3.4 Of course, such a Trust Agreement must be strong enough to withstand challenge by Creditors.  If the Settlor (Transferor) has or retains clearly identifiable rights under the Trust, the Creditors will simply take over those rights, as judgment Creditors stand in the same relation to those rights and assets as does the Settlor.  For example, if the Transferor retains a life interest in the income, the Creditors may seek to attach the income stream. 

3.5 Discretionary Trusts are therefore ideal instruments for Creditor Protection Planning.  Under a Discretionary Trust, the Settlor/Transferor gives up control over the assets to the Trustees, and the beneficiary group do not have any rights or entitlement over the Trust fund.  The decision and timing as to which of the group of Beneficiaries may receive a payment from the Trust is entirely up to the Trustees. 

3.6 The Settlor/Transferor will usually (but not always) be included in the class of Beneficiaries.  As such, he/she has no "rights" or "interests" capable of attachment.  However, as a Beneficiary, the Transferor will still be able to receive benefit from the Trust in the future, subject always to the Trustees' decision.  But the important result is that, from the Creditor's standpoint, the Settlor/Transferor has no definable interest in the Trust, so neither can his/her creditors. 

Estate of German v. United States 7C.Ct.641 (1985)

3.7 Thus, on the face of it, once the portion of the Settlor/Transferor's assets for which protection is desired has been properly transferred into the Discretionary Trust, the Transferor's worries should be over. 

3.8 But key to successful CPT structuring lies in ensuring that the actual Transfer itself by the Settlor is valid and impeachable. 

3.9 In this regard, there are important legal provisions in the Transferor's home jurisdiction which Creditors may try to invoke in order to "undo" the original Transfer of assets into the Trust.  These are the laws relating to (1) insolvent or fraudulent transfers, and (2) bankruptcy.  Trust provisions may also be void to an extent they are contrary to the policy of bankruptcy law, although "Protective Trusts" are a permissible exception to this.  Part 4 of this Paper looks at those Laws in greater detail.