asset protection trust

Asset protection trusts in tax havens

What is an asset protection trust?

Any form of trust that provides for assets to be held on a discretionary basis under the control of a trustee for the benefit of the beneficiaries.

Where are the tax havens?

These offshore jurisdictions prefer to call themselves Offshore Financial Centers (OFCs) and they may be broken up subcategories of Conduit OFCs or Sink OFCs. OFCs include Switzerland, the British Virgin Islands, Luxembourg, Bermuda and the Cayman Islands.

What are the benefits of an asset protection trust?

  • Flexibility of taxation planning
  • Avoiding family breakdown issues affecting control of assets
  • Avoiding claims by creditors of bankrupt beneficiaries affecting assets

What are the benefits of setting up your asset protection trust in a tax haven?

  • Limitation of potential legal actions against the trust in the offshore jurisdiction
  • Difficulties obtaining information about the trust by potential claimants
  • Tax advantages

What risks do Australian face in setting up an asset protection trust offshore?

The main risk is that they will receive an Australian tax bill. A non-resident company controlled directly or indirectly by Australian residents will be deemed to be a “controlled foreign company” under Australian tax law. The secondary risk is that by entrusting assets to a foreign jurisdiction the appointor will have more limited rights of recourse if they suffer civil or criminal misfeasance in the foreign jurisdiction.

What are the different types of asset protection trusts available in the offshore jurisdictions?

  • British Virgin Islands: VISTA protected trust (pursuant to the Virgin Island Special Trusts Act 2003)
  • Cayman Islands: STAR trusts (pursuant to the Special Trusts (Alternative Regime) Law 1997)
  • Lubuan, Malaysian: Labuan special trust (pursuant to the Labuan Trust Act)

What are common features of offshore trusts that depart from Australian trust law?

  • Rules against perpetuities do not apply
  • Beneficiaries may also be objects
  • Beneficiaries have no rights to enforce trusts
  • Beneficiaries have no rights to information about the trusts
  • Special roles of appointor including “protector” or “enforcer” of the trust
  • Appointor has wider powers to amend terms of trust, apply income or capital, issue directions to the trustee and appoint and remove a trustee
  • Low or no tax rates for income generated

What is interesting about Labuan special trusts for Australians (both asset holders and creditors)?

This is a matter of interest for both asset holders and also claimants to interests in trusts settled in Labuan, Malaysia.

This jurisdiction is a special zone for the purposes of tax and corporate law and is the subject of different law to the rest of Malaysia. The tax haven has crafted law to foster the investment of monies through trust structures. There are special tax rates so trust income is taxed at 3% of profit or at a relatively low flat rate.

Pertinent laws to protect Labuan trusts include:

  • No foreign law or judgment in relation to marriage, succession or insolvency is enforceable against a Labuan trust.
  • The onus of proof in any claim against a Labuan trust is generally “beyond reasonable doubt” (i.e. criminal not the civil burden in Australia).
  • A strict limitation period for commencement of court proceedings including one year from the date of any disposition.
  • Successful claims against a trust may only be met from the property held by the trust (i.e. protecting the corporate veil).
  • Note that under Malaysian law an Australian judgment is not registrable under their express law of recognition.

Take-away for interested Australians for Labuan special trusts: Given the closer time zone, no automatic reciprocation of Australian judgments and limitations on causes of action make advancing a claim would be a challenging task

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