Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary.
Most of them contain a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor.
The laws of certain jurisdictions including Alaska, Bermuda, and the Cayman Islands allow self-settled trusts to afford their settlors the protection of the spendthrift clause.
[1] Trusts were developed at common law in England originally to minimize the impact of inheritance taxes arising from transfers at death.
Alaska was the first US jurisdiction to enact laws allowing protection for self-settled trusts (in 1997) and was shortly followed by Delaware, Nevada, South Dakota and a few others.
The efficacy of a DAPT may also be challenged under the Supremacy clause of the U.S. Constitution, under the applicable fraudulent transfer statute, or because the settlor retained some prohibited control over the trust.
[citation needed] These jurisdictions are also known as United States Asset Protection Trusts (USAPTs), from the point of view of the non-US settlors.
[2] South Dakota was one of the first states (1983) to allow a trust to endure perpetually, essentially jumping outside the onerous federal transfer (gift, estate and generation-skipping) tax system theoretically forever.
The Bahamas do not recognize self-settled spendthrift trusts, unlike the Cook Islands, Nevis, or Belize.
The burden of proof for a claimant to challenge a transfer into a Bahamian Trust has a limitation period of two years, the same as Cook Islands.
The quality of the banking and investment services is reasonable for the uses of a Trustee of an asset protection trust, however, the quality of the judiciary is considered low, as the legal profession is generally closed to the entry of non-Bahamians, and it is therefore difficult bring the knowledge of a specialised trust lawyer to the jurisdiction when needed.
Belize, offers immediate protection from court action initiated by creditors which challenges the settlor's transfer of property into the trust.
A number of offshore jurisdictions have enacted modern asset protection legislation based on the Cayman Island's Fraudulent Dispositions Law 1989 (the "FDL").
[4] The Cayman Islands FDL states "Every disposition of property made with an intention to defraud, and at undervalue, shall be voidable at the insistence of an eligible creditor thereby prejudiced".
The Cook Islands claims to be the first country to have enacted an explicit asset protection law, implementing particular provisions in 1989 to its International Trusts Act.
The trust laws of the Cook Islands provide a shortened statute of limitations on fraudulent transfer claims.
The effect of these provisions is to raise the burden of proof to "beyond a reasonable doubt," something akin to a criminal law standard, in order for a creditor to establish a fraudulent transfer.
However, some landmark decisions show that the Cook Islands Court intends to uphold the asset protection trust law.
Whilst specialised training is required in order to practice law in each of the Bailiwicks, the Bar is not open to everyone, the quality of the judiciary is generally considered very good, if not very expensive.
Regulation of Fiduciary companies and the related banking and investment services offered in the Channel Islands is also considered good to excellent.
The establishment of a trust structure in the Channel Islands is therefore generally thought of as a sound investment decision and those looking to do so expect a high degree of certainty in terms of the court's approach to the law and disputes should they emerge.
Following an eight-day hearing in December 2020 (which caused further hundreds of thousands of pounds in legal fees to be incurred), the Guernsey Royal Court will rule on the extent to which the current trustees’ challenges will be allowed or struck out.
The current authority on point is the Jersey Court of Appeal's decision in Alhamrani v JP Morgan Trust Company.
Investec are arguing for an interpretation which would generously favour trustees and even go so far as allowing them to leave it to their lawyers to dictate and control legal spend, which for a regulated entity is nothing less than extraordinary.
If such an approach was to find favour with the Royal Court, settlors and beneficiaries would be well advised to consider whether they ultimately have the protections they thought they did, and reforms directed towards the incurrence of trust related expenses and in particular controls in respect of litigation costs may well be needed.
With various reforms in England and Wales aimed at keeping litigation costs reasonable, it is high time for the lawmakers of the Channel Islands to follow suit and ensure that trustees (and their lawyers) are not given an open cheque book to spend trust funds in litigation without regard to the value of trust assets at their disposal or the interests of the true owners of those assets.
One question raised by this approach is whether a creditor can seize assets in Switzerland or Liechtenstein without having to bring a claim in the trust-protective jurisdiction.
Orders under divorce and creditor protection laws can typically be made against that individual notwithstanding the alleged independence of such trustees.
In May 2008, the U.S. government sought to hold the domestic protector in contempt of court for failing to secure the cooperation of the foreign trustee to resign and repatriate the trust assets.
The Grant case stands for the proposition that no vulnerability exists if the domestic protector complies with the court's orders.