Asset Protection

6.1 Within the United States, creditor enforcement against Transfers into Trust broadly follows the United Kingdom model, with statutory provisions barring both "Fraudulent Conveyances" and "pre-Bankruptcy Transfers".  In addition, there is legislation at both Federal and State level.

6.2 The Federal Bankruptcy Code (11 U.S.C) contains provisions on both Fraudulent Conveyances, and Pre-Bankruptcy Transfers.  S.544 (b) of the Bankruptcy Code allows a Trustee in bankruptcy to invalidate a fraudulent conveyance (Transfer), but contains a renvoi (or referral) to State Law to determine if the Transfer is voidable: if it is voidable, then the Trustee in bankruptcy can also avoid it.

6.3 S.548 of the Bankruptcy Code allows the Trustee in bankruptcy to set aside all Transfers made within one year of filing of the petition in bankruptcy if the Transfer was made at a time when the debtor received less than reasonably equivalent value, and the debtor was insolvent at the time of the Transfer, or was rendered insolvent as a result of the Transfer. Insolvency is measured by comparing debts to "non-exempt" property.  Future creditors (i.e. those arising after the Transfer) can also seek to satisfy the Transfer.

6.4 Creditors rights are generally governed by the Settlor's local State Law.  The applicable State Law is determined by many factors, including the residence of the Settlor, the situs of the disputed property and the place of the Transfer.

6.5 On "Fraudulent Conveyances", the new model law, the Uniform Fraudulent Transfer Act 1984 ("UFFA") may be applicable.  Section 4 UFTA defines a "fraudulent conveyance" as one made "with the actual intent to hinder, delay or defraud any creditor of the debtor", irrespective of whether the creditor's claim arose before or after the Transfer was made.

6.6 Transfers made with an actual intent to defraud are voidable by both existing and future creditors.  "Actual intent" is defined broadly and the section enumerates activities that would constitute it.  A Transferor who only places a portion of his/her wealth in a CPT should be able to avoid the conclusion that there was "actual intent".

6.7 Under the UFTA, a Transfer made when the Transferor was insolvent is also characterized as a "Fraudulent Conveyance", and creditors (both existing and future) may be able to set it aside.  This also extends to Transfers when the Transferor was rendered insolvent as a result.  The general rule is that Transfers will only be upheld if made when the Transferor was not "insolvent" or rendered "insolvent" as a result of the Transfer.  "Insolvent" is measured by the excess of liabilities over assets (other than excluded assets -- see 9.6.4 below), or the inability to pay debts as they fall due.

6.8 Under s.5 of the UFTA, a Transfer is deemed to be "fraudulent" if it is made for less than full value at a time when the Transferor is insolvent.  Such a conveyance is voidable by the existing creditors of the Transferor.

6.9 States that have not yet adopted the UFTA, may be governed by provisions of the older Uniform Fraudulent Conveyances Act ("UFCA").

6.10 Also, some States (e.g. Florida) have Statutory provisions permitting existing Creditors to seek to attach property on a debt NOT due if the Debtor is removing his property out of State, or secreting it to avoid payment of his debts.

6.11 The next part of this Paper will look at direct and indirect enforcement of Creditor claims in the Offshore jurisdiction.