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

AuthorRose-Marie B. Antoine
Challenges to the Offshore Trust
Fraudulent Conveyances and Conflict of Laws
Rose-Marie B. Antoine
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
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,
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
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
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

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