My mother was in Holland when the Nazis invaded. She used to tell us chilling stories of how the German soldiers would come looking for young Dutch men such as my uncles to conscript into building their roads, and how her aunt who lived next door was starving and would beg food from my grandmother who was eager to preserve every precious morsel for her children.
My grandparents were lucky. My grandfather was the mayor of Rotterdam and ran a successful Dutch Gin business, (the first to make flavoured spirits). His family was better off than most; they could buy meat and eggs on the black market in exchange for gin.
Like so many wealthy entrepreneurs he squirrelled his excess wealth in numbered Swiss bank accounts – if he had not done so his hard earned monies would have been confiscated by the Nazis. It was widely believed that Switzerland would remain un-invaded and that numbered bank accounts would protect his identity; on both counts he was right.
Protection of assets from invading governments, criminals, spendthrift family members or wronged spouses has long been big business. Swiss private banking grew fat on its famous numbered bank accounts – which have now long gone, only to be replaced by trusts in offshore financial centres.
Trusts – the brain child of the UK to protect assets for the families of Crusaders was a brilliant legal arrangement. The Crusader would transfer his wealth into the name of his trusted adviser with clear instructions that the monies were to be used only for the benefit of the Crusader’s wife and children. Unsurprisingly this legal arrangement came to be called the ‘Trust’.
The brilliant element of the Trust is to split Charles from his property which he transfers to John (in John’s own name) as ‘Trustee,’ but not for John to spend on himself, but to spend only for the benefit of Lucy, Frank and Leslie, the wife and children of Charles. The obvious benefit of this legal arrangement is that if Charles were to die while crusading, his property would still be owned by John for the benefit of Charles’s family, who may not be able to manage their own financial affairs without some assistance. Furthermore, Charles’s family would have avoided all the difficulties any family can face if death cannot be proved through the lack of a body. This splitting of property ownership has, over the years proved remarkably useful, not only for succession, succession without a body, wealth preservation and management, but also for asset protection.
Most assets can be protected. An entrepreneur will ring fence new businesses through ‘limited liability’ companies, and from natural disasters by insurance, but risks from unscrupulous individuals or greedy counter parties, spendthrift family members or litigious adversaries are not so easy to protect without a trust. In these circumstances the wealth owner may be wise to put his wealth in trust for his family.
There does however need to be a balance. Most States in the US do not recognise ‘Self Settlor’ Trusts. This means that a creditor of the settlor can pursue settled assets if the Settlor is a Beneficiary. These are called Domestic Asset Protection Trusts (DAPTs), and of course there are exceptions. The first State to see the commercial advantages of setting up DAPTs was Alaska, which was subsequently followed by Delaware, Nevada, South Dakota, and Nevis.
Offshore financial centres such as the Cayman Islands however, take a different approach. If the Settlor made the transfer to the Trustee with the intention of defrauding creditors, then the creditor can have the transfer set aside. In the Cayman Islands the time limit for a Creditor to bring a claim is six years. The Bahamas has a similar law, but the time limit is only two years, which is also true in the Cook Islands.
The moment jurisdictions have different laws; settlors have a choice. If asset protection is important to a settlor it is first important to know why. In all the cases in which I am an advisor the main reason why the Settlor wants privacy is to protect his family and wealth from criminal activity or exploitation. This right to privacy would appear to be recognised by the draftsman of the Data Protection Act, but is conveniently ignored when it comes to the collection of taxes.
If you agree, disagree or have any comment, or if you would like to book an appointment with Caroline or any one of her team, please contact email@example.com or call 020 3740 7423.