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OFFSHORE TRUSTS: The Anguillian Example A funny thing happened on my way to the courthouse. After some 20 years of litigation throughout the states, prosecuting and defending million dollar claims, I took an unplanned turn and wound up living in the Caribbean. On the day I informed my partners of my "early retirement" most wished me a fond bon voyage, but there were a few who were certain that I was in need of immediate psychiatric attention. I will confess that leaving a fun and exciting law practice, not to mention a healthy income, did seem beyond the limits of sanity. But, even the sane have to be insane once in awhile. So with no plans of employment, we sold our home and most of our belongings, and said goodbye to our family and friends. Next stop - Anguilla, British West Indies! Anguilla is the most northerly of the Leeward Islands of the Caribbean, nestled five miles north of St. Martin. This island nation, which consists of some thirty-nine square miles, has approximately sixty-four miles of coastline, some of the finest beaches in the Caribbean, and the friendliest people one can find. The Anguillian Government, with an eye to its economic future, created an aggressively secure offshore financial center. To make it even more enticing to the successful businessperson, there is no income tax, personal or corporate, in Anguilla. A businessperson's paradise! OFFSHORE FINANCIAL CENTERS Offshore Financial Centers have become an international phenomenon, created by many island nations as a means of securing their own financial development. To successfully compete in this growing market, an island nation must implement innovative offshore legal concepts, which are unique to their jurisprudence, but are generally consistent with other similarly situated countries. An excellent example of this burgeoning jurisprudence is Anguilla's offshore financial legislation. The Anguillian Government, with the aid of the British Crown, carefully designed and implemented special legislation to promote and protect its own highly secure offshore financial services industry. An impressive financial package of legislation was enacted to assure the stability of this Offshore Financial Center, including the Trust Companies & Offshore Banking Act, the Trust Ordinance, the Companies Act, the International Companies Act, the Limited Liability Companies Act, the Limited Partnership Act, the Confidential Relationships Act, and the Fraudulent Disposition Ordinance. The result of the enactment of this extensive legislative package was the formation of one of the premier Offshore Financial Centers of the Caribbean. OFFSHORE TRUSTS The Trust Ordinance was a significant piece of the financial legislative package enacted by the Anguillian Government. Trusts have routinely been used to limit the excesses of taxation, litigation, matrimonial squabbles, heirship laws, and general property rights. In recent times, with the increasing size of judgments, escalating taxes and advent of more governmental regulations, there has been an increase demand for secure trust planning. Clients are concerned more today than ever before with protecting what they have and minimizing their tax burdens. Offshore Trusts are an excellent vehicle for accomplishing this. The Anguillian legislature drafted the Trust Ordinance with a careful eye toward security, confidentiality and flexibility. These three guiding principals insure the integrity of the Offshore Trust JURISDICITIONAL SAFEGUARDS As with all legislation regarding Offshore Trust, the most critical elements of the legislation are typically those statutory provisions, which establish the applicable jurisdiction and choice of law. This is the very heart and soul of all offshore protective legislation. For the Offshore Trust must not find itself under attack in an unfriendly jurisdiction. The Trust Ordinance has three principal sections dealing with the critical issues of jurisdiction and choice of law, which work in tandem to protect the integrity of the Anguillian Trust. In determining the governing law of an Anguillian Trust regard is first given to the actual terms of the trust instrument, and to any evidence therein as to the intention of the settlor; and, the other circumstances of the trust are to be taken into account only if the terms of the trust fail to provide such evidence. A simple statement in the trust instrument expressly selecting the laws of Anguilla to govern the trust is valid, effective, and conclusive regardless of any other circumstances. With the application of Anguillian laws to the Offshore Trust, clear resolution of all questions arising in regard to the trust or in regard to any disposition of the property of the trust, are readily available, including questions as to: 1. the capacity of the settlor; 2. any aspect of the validity of the trust or disposition or the interpretation or effect thereof; 3. the administration of the trust, whether the administration be conducted in Anguilla or elsewhere, including questions as to the powers, obligations, liabilities and rights of trustees and their appointment or removal; or, 4. the existence and extent of powers, conferred or retained, including powers of variation or revocation of the trusts and powers of appointment, and the validity of any exercise thereof. The determination of these various trust issues is governed solely by the laws of Anguilla, without reference to the laws of any other jurisdiction with which the trust or disposition may be concerned. This assures that the local courts and jurisprudence of Anguilla will protect the Offshore Trust. With a wary eye toward the possible interference of foreign courts, the Trust Ordinance expressly declared that no trust governed by the laws of Anguilla and no disposition of property to be held upon the trusts will be void, voidable, liable to be set aside or defective in any fashion, nor will the capacity of the settlor to be questioned by reason that: 1. the laws of any foreign jurisdiction prohibit or do not recognize the concept of a trust; or 2. the trust or disposition avoids or defeats rights, claims, or interest conferred by foreign law upon any person by reason of a personal relationship to the settlor or by way of heirship rights, or contravenes any rule of foreign law or any foreign judicial or administrative order or action intended to recognize, protect, enforce, or give effect to any such rights, claims, or interests. The Trust Ordinance further declares that where a trust is created under the laws of Anguilla, the court shall not vary it or set it aside or recognize the validity of any claim against the trust property pursuant to the laws of another jurisdiction or the order of a court of another jurisdiction in respect of: 1. the personal and proprietary consequences of marriage or the termination of marriage; 2. succession rights (whether testator or intestate) including fixed shares of spouses or relatives; 3. the claims of creditors in an insolvency; or, 4. the imposition of any foreign tax or duty. Moreover, Section 7 of the Trust Ordinance is statutorily declared to be superior to the provisions of Anguilla's Reciprocal Enforcement of Judgments Ordinance , making the Trust Ordinance the ultimate trump card in legal battles over an Anguillian Offshore Trust. SPENDTHRIFT TRUSTS The typical Offshore Trust is remarkably similar to most domestic trust, though with some significant opportunities. An excellent example of the opportunities afforded in the typical Offshore Trust is the "protective or spendthrift trusts." In most domestic jurisdictions, the spendthrift trust has been greatly weakened, if not outright eliminated. However, in many offshore jurisdictions the spendthrift trust remains firmly intact. This is certainly true in Anguilla, where the Trust Ordinance declares that the terms of a trust may make the interest of a beneficiary: 1. subject to termination; 2. subject to a restriction on alienation of or dealing in that interest or any part of that interest; 3. subject to diminution or termination in the event of the beneficiary becoming insolvent or any of his property becoming liable to seizure or sequestration for the benefit of his creditors Any property placed in an Anguillian Trust, which contains a spendthrift provision must be held for the benefit of a beneficiary and the trustee is required to hold that property: 1. in trust to pay the income to the beneficiary until the interest terminates in accordance with the terms of the trust or a determining event occurs; and, 2. if a determining event occurs, and while the interest of the beneficiary continues, in trust to pay the income to such of the following (and if more than one in such shares) as the trustee in his absolute discretion shall appoint: a. the beneficiary and any spouse or child of the beneficiary; or, b. if there is no spouse or child the beneficiary or the persons who would be entitled to the estate of the beneficiary if he had then died intestate and domiciled in Anguilla. A "determining event," as used in the Trust Ordinance means the occurrence of any event or any act or omission on the part of the beneficiary (other than the giving of consent to an advancement of trust property) which would result in the whole or part of the income of the beneficiary from the trust becoming payable to any person other than the beneficiary. This would include a judgment, or judicial/administrative directive ordering the beneficiary to deliver his or her income interest in the trust to a third party. To make certain that the provisions of the spendthrift trust are given full force and effect in protecting the settlor who is also the beneficiary, the Trust Ordinance declares in no uncertain terms that any law or public policy which might prevent a settlor from establishing a protective or spendthrift trust of which he is a beneficiary are "abolished." EXCLUSION OF UNWANTED BENEFICIARIES Moreover, offshore jurisdictions which embrace the full sanctity of the Offshore Trust give the settlor the ability to exclude from the benefits of the trust those individuals or class of individuals that are not welcomed. This is true of Anguilla, where the Trust Ordinance embraces the right of a settlor to exclude beneficiaries, which is important in maintaining the sanctity of the client's plans. This exclusion from the benefits of the trust could include a spouse, a child, creditors or other claimants, courts of foreign jurisdiction, foreign governments, and their various administrative agencies. This exclusion ability is but another important safeguard to combat circumstances where the beneficiary may subsequently be coerced into directing the trustee to pay over assets of the Offshore Trust to a creditor, spouse or other adversary. MEMORANDUM OF WISHES With most Offshore Trusts, the settlor and beneficiary are given significant powers over and access to the trust property. The Trust Ordinance authorizes the settlor, as well as any beneficiary to give to the trustee a "letter or memorandum of wishes" expressing the desires of the settlor or beneficiary with regards to the exercise of any functions conferred on the trustee by the terms of the trust. This is particularly useful with the Offshore Trust where the client's needs may easily be met by this informal action. (e.g. requesting that the trustee to purchase a vehicle, which vehicle is then to be "leased" to the beneficiary by the trust) It is, however important to note that where the trustee may give regard to the letter or memorandum of wishes in exercising any functions conferred upon him by the terms of the trust, the trustee is not bound to those instructions nor is the trustee accountable in any way for the failure or refusal to comply with the wishes expressed in the letter or memorandum. This power allows the trustee to freely ignore a letter written under duress of a foreign court's order. For instance, should a Texas court order a beneficiary to instruct the trustee to either pay a given judgment or tax, or to turn over the trust assets to a given creditor, the trustee may freely chose to ignore the beneficiary's directive. OFFICE OF THE PROTECTOR To protect the settlor from a trustee's misbehavior, many offshore jurisdictions have established the office of protector. This is true in Anguilla, where the Trust Ordinance grants the protector of the trust the oversight position. The terms of the trust may select a protector, who may be either an independent third party, or the settlor or beneficiary of the trust. The protector is empowered to: 1. remove a trustee and to appoint additional trustee; 2. to enforce the trust; 3. do whatever else the terms of the trust empowers the protector to do in order to fulfill his fiduciary duty to the beneficiaries of the trust and to the purpose for which the trust is created. This allows the protector to not only protect the Offshore Trust from the corrupt trustee, but also to fight off any adverse claims against the trust, the trust assets, or the fulfillment of the trust purpose. For these reasons, it is important to keep in mind that the powers of the protector are too broad to allow them to rest within the United States where a court could intervene, usurping these broad powers and interfering with the possible wishes of the settlor. For that reason, as with selecting the trustee, it is important to select wisely one who is residing in a foreign jurisdiction, which is committed to the protection of Offshore Trusts. The trustee/protector, who is located within the jurisdictional limits of Texas, or the United States for that matter, will be subject to a court's direction and control. That is to say the trustee/protector may find himself subject to a court's order requiring that all of the trust assets be turned over to a creditor or other third party. If, however, the trustee/protector reside offshore, they might be in a position to simply ignore the orders of an interfering domestic court. RULES AGAINST PERPETUITIES Offshore jurisdictions have, in order to enhance the Offshore Trust, abolished the application of the rules against perpetuities to such trust. Anguilla followed suit in its enactment of Section 6 of the Trust Ordinance, thereby stating that the rules against perpetuities "shall not apply to a trust." For avoidance of any doubt it was declared that the rules referred to in that section include: (a) the application or effect of those rules in respect of accumulations; and, (b) the rules of law prohibiting trusts of perpetual duration. The terms of the Offshore Trust may direct or authorize the accumulation of all or part of the income of the trust for a period not exceeding the maximum duration of the trust. TAX BENEFITS With regard to tax issues, Offshore Trusts typically provide protection clients find very satisfying. The Trust Ordinance provides in no uncertain terms that if the settlor and beneficiaries are not residents of Anguilla and the trust property does not include any land situated in Anguilla or shares of any company beneficially owning any such land, then the trust shall be exempt from any income tax, withholding tax, asset tax, gift tax, profits tax, capital gains tax, distributions tax, inheritance tax, estate duty or other like taxes based upon or measured by assets or income originating outside of Anguilla or in connection with matters of administration which may occur in Anguilla. This aspect of the Trust Ordinance gives the practitioner the ability to combat the various governmental agencies, which might seek to tax the Offshore Trust. FRAUDULENT DISPOSITION ORDINANCE To further protect the Offshore Trust the Anguillian Government, as is true with most offshore jurisdictions, enacted the "Fraudulent Dispositions Ordinance, 1994". ("FDO") Designed primarily to function in tandem with the Trust Ordinance, the FDO strengthens the ability of the trustee to avoid third-party claims against the Offshore Trust and its assets. The FDO places a heavy burden on the creditor who seeks to attack the Anguillian Trust, by requiring that any action brought to attack the trust or the assets of the trust be brought in the Anguilla High Court within three years of the date that the assets were placed in the Offshore Trust. Moreover, the "ought to be known" provision of Anguilla's Limitations Act is expressly made of no effect ; thereby assuring that the limitation clock begins to run at the time assets are transferred to the trust. Should the creditor have had sufficient foresight to timely pursue an attack on the Offshore Trust, the creditor faces the burden of proving that the disposition of property was made with an "intent to defraud," at an "undervalue". "Intent to defraud" is a defined term, which means "an intention of a transferor willfully to defeat an obligation owed to a creditor." The operative phrase is "obligation owed to a creditor." An obligation is statutorily defined as an obligation or liability (including contingent liabilities), which existed on or prior to the date of the relevant transfer and of which transferor had notice. The first issue to face, is when does the obligation become "owed to the creditor"? In a typical lawsuit there is clearly an argument that the obligation does not arise until such time as a proper pleading is filed which places the transferor on notice. Some might even argue that the obligation only arises after a final judgment has been entered. As such, a disposition made prior to the filing of a proper pleading, or possibly even before a final judgment has been entered, would arguably have been without the requisite intent, which intent the creditor is required to prove. Even if a creditor succeeds in proving the requisite intent to defraud, and at an "undervalue," victory is far from at hand. For in the event the Court agrees to order a disposition set aside, there are strict limitations set upon the Anguillian Court by the applicable statutes. First, the disposition can be set-aside only to the extent necessary to satisfy the creditor, which does not allow for the entire disposition to be unraveled. Moreover, if the Anguillian Court is satisfied that the transferee has not acted in bad faith (the burden of proving bad faith resting on the creditor), the transferee has a first and paramount charge over the property equal to his entire costs properly incurred in the defense of the action. Further, the disposition is only to be set aside "subject to the proper fees, costs, pre-existing rights, claims, and interests of the transferee." In that Section 5(1)(b) of the Fraudulent Disposition Ordinance makes it clear that the disposition shall only be set aside subject to the right of a beneficiary to retain any distribution made consequent upon the "prior exercise" of a trust, power or discretion vested in the trustee of such trust, the creditor may find the pot without gold once he arrives. For it is possible to argue that the mere establishment of the trust, and placing of assets therein, triggers the "prior exercise" clause to the benefit of the beneficiary. STRICT CONFIDENTIALITY |
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