Challenges to the Offshore Trust: Fraudulent Conveyances and Conflict of Laws

• Author: Rose-Marie B. Antoine
• Pages: 102-141

LEGAL ISSUES IN OFFSHORE FINANCIAL SERVICES

102

11

Challenges to the Offshore Trust

Fraudulent Conveyances and Conflict of Laws

Rose-Marie B. Antoine

Introduction

THE TRUST IS A POPULAR VEHICLE of investment in the offshore sector

and its ability to conquer the multi-national borders of the industry is

remarkable. As such, it is crucial to the legal framework of the offshore centre.

It is the inherent flexibility of the trust that makes it such an attractive tool for

offshore investors. However, such flexibility is not without limitations or

difficulty.

The offshore industry has been responsible for the transformation of the

trust into a unique creature designed specifically to meet the needs of offshore

investment. For example, such entities as the ‘reversible trust’ and the ‘purpose

trust’ are peculiar to the industry. The legal source for the offshore trust is

statutory. The transformation of the institution of the trust, for motives which

are often controversial, can create difficulty for its application in law.

The first question which may be posed is this: Given its changed features,

is the offshore trust a legitimate or true trust such that it can be accommodated

under the broad and traditional principles of the trust? This line of inquiry is

relevant both to the extent that existing legal rules of the onshore trust can be

imposed upon this legal mutation and to which the offshore trust can be

allowed to expand or undermine trust jurisprudence. It questions the ability of

both domestic onshore laws and private international law to challenge the

legitimacy of the offshore trust. It goes to the very raison d’être of the offshore

trust. The issue assumes particular importance if one considers that the true

aims of the offshore trust and those of the onshore trust may be quite different.

One may come to the conclusion, for example, that the offshore trust is

merely a distortion of the pure trust concept. It may be, in essence, always a

‘sham,’ existing simply to obfuscate, despite its disguise.1 Similarly, it can be

argued that its very existence is against public policy. On the other hand,

103

Challenges to the Offshore Trust

there is merit to the argument that the offshore trust serves a legitimate function

in a modern international business environment. It may be a sufficient exercise

for courts and jurists to be concerned, not with the more fundamental question

of the rationale for the offshore trust, but with ensuring that it conforms to the

legal form of the English trust as we know it.

The second issue is related to the first. Even if one accepts that the offshore

trust is a legitimate, albeit, a hybrid entity, one must still test its validity

against the backdrop of traditional trust principles. The legal analysis must

involve the issues of proving the validity of the transfer of assets into the trust

and the trust instrument itself. This is true whether one is attempting to discern

if the trust is a fraudulent conveyance, a ‘sham,’ or whether it should be foiled

because it violates other legal fundamentals of the trust. These include rules

on certainty, equity and perpetuity. Addressing this central issue is therefore

essential before other legal questions are resolved.

The validity of the trust can also be tested against conflict of laws principles

and the extent to which onshore laws are antagonistic to the offshore trust.

When one juxtaposes traditional ideas of law with the innovative and

aggressive trust law principles embodied in the offshore legal infrastructure,

there are clearly discernible conflicts of legal interests. These stand to be

resolved and have already begun to be tested before the courts.

The Rationale of the Offshore Trust

The trust, being a creature of the common law legal tradition, is more a

characteristic of those offshore jurisdictions whose legal traditions stem from

English law.2 Nonetheless, in the context of transnational offshore business,

those jurisdictions which do not incorporate the trust concept into their law,

would have, at some point, to understand and deal with the phenomenon.

A notion of dual ownership is fundamental to the trust, with the legal

interest vested in the trustee while the beneficial ownership vests with the

beneficiaries. It is this duality which makes the trust such an appropriate tool

in the world of offshore finance, a world which often relies on the illusion of

ownership and control for its success.3

A unique jurisprudence is created by the special trust legislative provisions

in offshore jurisdictions. Generally, these provisions are designed to encourage

investment offshore. They undermine the ability of onshore jurisdictions to

challenge the offshore trust and counter onshore laws antagonistic to offshore

investment. These include changes to trust law to make the trust more

commercially viable and mobile, laws relating to bankruptcy and enforcement

LEGAL ISSUES IN OFFSHORE FINANCIAL SERVICES

104

of creditors’ claims which preserve the integrity of offshore assets and provisions

specifying the governing law of the trust and jurisdiction.

It is not merely the capacity of the offshore trust for jurisdiction hopping

or generally frustrating creditors’ claims which are the true source of its

effectiveness. Rather, it is the juxtaposition of two often fundamentally opposed

systems of trust law, the aim being to bring offshore trusts squarely under the

jurisdiction of an innovative and efficient body of offshore trust law. This

avoids the law of onshore legal systems hostile to offshore purposes. Such

offshore law acts as a foil or legal bar to claims emanating onshore. Judicial

decisions have often supported this offshore legislative framework offshore

that appear (rightly or wrongly), to be fully supportive of offshore legal policy.

Consequently, the onshore legal system now has to come to terms with this

development of the offshore trust and corresponding jurisprudence. Already,

the form, functions and motives of the offshore trust have begun to be measured

onshore.

Asset Protection Trusts

The prime rationale for the contemporary offshore trust is the protection of

assets from potential onshore creditors and other claimants to the settlor’s

assets. The offshore asset protection trust seeks to shelter offshore assets from

any threatening source which might procure financial loss. The focus is on

preventing onshore creditors and others wishing to obtain the assets from

reaching them by utilising the dual nature of the trust. Since the person who

initiates the trust, the ‘settlor,’ (or ‘grantor’ in the United States), can no

longer be viewed as having legal ownership of the assets, a challenge to the

settlor will not easily reach the assets he or she has settled in the trust. In

theory, once a trust is validly founded, its assets, in as far as attempts to reach

them are concerned, are treated as if they have been given away completely.

The fear of expropriation of assets, usually for political reasons, has

historically been a popular rationale for placing assets offshore in the form of

a trust. The contemporary offshore asset protection trust, however, is more

popularly being used by wealthy professionals4 seeking a reprieve from

expensive tort actions, and to provide cover for inadequate insurance for such

actions. It may also be used to ‘hide’ assets from present or ex-spouses and

children who may otherwise be entitled to them. In recent years, offshore

asset protection trusts have been increasingly marketed by law firms, and

international financial service businesses. As one enthusiastic US estate planning

practitioner commented:

As our national litigation epidemic continues to spread . . . wealthy people are

becoming increasingly concerned about the loss of assets to satisfy claims of