Exotic Trusts
Thus far, we have limited our discussion to entities that are recognized under what could be called Anglo-American jurisprudence, i.e., those entities that were creatures of the well-established statutory law and common law of England and the United States. Even the relatively recent U.S. limited liability company, an entity which does not exist in the same form under English law, is little more than a hybrid, combining traits of U.S. corporations and U.S. partnerships.
Most of the popular offshore havens are decidedly English in character, including Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man, the Bahamas, Nevis, the Channel Islands, Gibraltar, and the Cook Islands. Although certain laws of these jurisdictions are decidedly debtor-friendly, their laws are still quite fundamentally English in character and thus an easy fit for usage by the former Thirteen Colonies and their progeny.
Nonetheless, Anglo-American Jurisprudence is quite limited in geographic scope. Though Britain may exercise influence over the most popular offshore centers and the U.S. may dominate international commerce, many countries have adopted other legal systems, the most prevalent being civil law jurisprudence based largely on the Napoleonic Code. Most continental European countries, for instance, have civil law systems as do the numerous former colonies of France, Spain, and the Netherlands.
While civil law jurisdictions authorize certain entities that are very similar in structure and organization to common law entities, they also create entities that are quite alien to Anglo-American jurisprudence. Some U.S. planners have taken an interest in these strange (to us, that is) entities, primarily for tax motivated reasons. Some believe that the IRS may struggle with how these entities should be characterized for tax purposes, thus leading to more favorable tax treatment than that received by traditional U.S. entities. The tax treatment of these entities is beyond the scope of this book; however, the hopes of favorable tax treatment may be overly optimistic. To the contrary, the IRS might characterize such an entity in a much worse way than if the entity were of a well-recognized domestic variety.
Nonetheless, however the IRS might treat these civil law creations, they do raise some interesting possibilities from the asset protection perspective based on the similar notion that U.S. courts and creditors may have difficulty grasping the operations and implications of unfamiliar civil law entities. Some of these entities are not required to have individual persons or entities as owners or beneficiaries. Rather, like U.S. non-profit corporations, they are created for some defined (or better -- vaguely defined) purpose. At the end of this Chapter, we will also examine the "purpose trust" which is a common law trust without specific beneficiaries.
Remember, one goal of asset protection planning is to create doubt in the mind of a creditor about whether recovery is possible. If a creditor has trouble in understanding a particular type of entity and in formulating a plan of attack against the entity, the creditor will be more likely to settle. If an entity has no specific beneficiaries, it may be difficult for a creditor to argue that a transfer to the entity had a fraudulent purpose as opposed to being a completely altruistic endowment. Also, the absence of specific beneficiaries means that there are no creditors of beneficiaries with which to contend. So long as the original contribution to the entity was not a fraudulent transfer, the assets will be protected from creditors. For these reasons, some of these "exotic" civil law entities may play a useful role in asset protection planning.
Civil Law Entities: Anstalts, Stiftungs and Panama Foundations
Purpose Trusts & Foreign Foundations
Private Trust Companies
Most of the popular offshore havens are decidedly English in character, including Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man, the Bahamas, Nevis, the Channel Islands, Gibraltar, and the Cook Islands. Although certain laws of these jurisdictions are decidedly debtor-friendly, their laws are still quite fundamentally English in character and thus an easy fit for usage by the former Thirteen Colonies and their progeny.
Nonetheless, Anglo-American Jurisprudence is quite limited in geographic scope. Though Britain may exercise influence over the most popular offshore centers and the U.S. may dominate international commerce, many countries have adopted other legal systems, the most prevalent being civil law jurisprudence based largely on the Napoleonic Code. Most continental European countries, for instance, have civil law systems as do the numerous former colonies of France, Spain, and the Netherlands.
While civil law jurisdictions authorize certain entities that are very similar in structure and organization to common law entities, they also create entities that are quite alien to Anglo-American jurisprudence. Some U.S. planners have taken an interest in these strange (to us, that is) entities, primarily for tax motivated reasons. Some believe that the IRS may struggle with how these entities should be characterized for tax purposes, thus leading to more favorable tax treatment than that received by traditional U.S. entities. The tax treatment of these entities is beyond the scope of this book; however, the hopes of favorable tax treatment may be overly optimistic. To the contrary, the IRS might characterize such an entity in a much worse way than if the entity were of a well-recognized domestic variety.
Nonetheless, however the IRS might treat these civil law creations, they do raise some interesting possibilities from the asset protection perspective based on the similar notion that U.S. courts and creditors may have difficulty grasping the operations and implications of unfamiliar civil law entities. Some of these entities are not required to have individual persons or entities as owners or beneficiaries. Rather, like U.S. non-profit corporations, they are created for some defined (or better -- vaguely defined) purpose. At the end of this Chapter, we will also examine the "purpose trust" which is a common law trust without specific beneficiaries.
Remember, one goal of asset protection planning is to create doubt in the mind of a creditor about whether recovery is possible. If a creditor has trouble in understanding a particular type of entity and in formulating a plan of attack against the entity, the creditor will be more likely to settle. If an entity has no specific beneficiaries, it may be difficult for a creditor to argue that a transfer to the entity had a fraudulent purpose as opposed to being a completely altruistic endowment. Also, the absence of specific beneficiaries means that there are no creditors of beneficiaries with which to contend. So long as the original contribution to the entity was not a fraudulent transfer, the assets will be protected from creditors. For these reasons, some of these "exotic" civil law entities may play a useful role in asset protection planning.
Civil Law Entities: Anstalts, Stiftungs and Panama Foundations
Purpose Trusts & Foreign Foundations
Private Trust Companies
Labels: asset protection, asset protection trust, exotic trust
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