Recent Decision Concerning Asset Protection Trusts

I am often asked by clients, “How effective are international asset protections trusts?” With almost 20 years experience in advising clients on asset protection planning, the international asset protection trust (APT) remains our most recommended and effective protection strategy. In part, I recommend APTs (when appropriate) because of the trust-friendly laws that exist in certain foreign jurisdictions. A recent case in Jersey (Channel Islands) illustrates just how effective such laws can be when it comes to protecting trust assets.

In a June 2003 ruling (Abacus v. Esteem Settlement), the Royal Court in Jersey upheld a trust against an attack by creditors of the settlor-beneficiary. The trust in this case is a discretionary trust, with an independent trustee, whose beneficiaries are Sheikh Fahad Mohammed Al-Sabah (the trust settlor) (“Sheikh Fahad”), his wife and their son. Attempting to collect on an $800 million judgment against Sheikh Fahad (for fraud, no less), Plaintiff Grupo Torras SA (“GT”) sought to reach the assets of the trust on five separate theories, yet proved to be unsuccessful on each theory. In what proved to be a key factual determination for Settlor, the court determined that the trust funds in question were “clean assets,” i.e., assets that were validly contributed to the trust well before GT became a creditor of Sheikh Fahad. Since this ruling deals only with “clean assets,” fraudulent transfer was not at issue. Under accepted principles of Jersey common law, a self-settled spendthrift trust cannot be set aside by creditors—unless it was initially set up as a fraud against creditors.

First, GT argued that the trust was a sham. The Court, applying the “classic definition” of sham, ruled that the trust was not a sham, because there was no “common intention” between the trust parties (i.e., settlor and trustee) to create the appearance of legal rights and obligations that are different from the intended rights and obligations. Importantly, the Court held that Sheikh Fahad’s intent alone, as trust settlor, was insufficient to make a sham determination. That is, if a trustee enters in good faith into a trust with the intent to exercise its fiduciary powers and abide by the trust terms, then the trust is valid.

Second, GT contended that the trust was void because Sheikh Fahad retained “dominion and control” over the assets. Citing previous Jersey case law, the Court held that dominion and control by a settlor requires a retention by the settlor of the ability to dispose of the property “without consulting anyone else or without the consent of any other person.” Further, the Court surmised that a settlor may retain control through the language of the trust deed or through a secret arrangement with the trustee in spite of the trust language (i.e., a sham). Finding neither situation to in this case, the Court rejected GT’s second argument.

It is important to note that the Court found that Sheikh Fahad did not retain dominion and control, even though numerous transactions were made at Sheikh Fahad’s request and no such request was ever refused. In this regard, the Court stated, “In our judgment trustees who consider a discretion in good faith… cannot be said to be under the substantial or effective control of the requesting settlor… it cannot be sufficient simply to show that, in practice, trustees have gone along with a settlor’s wishes [because this result could be] consistent with the trustees having exercised their fiduciary responsibilities properly [by] having decided that each request of the settlor was reasonable and in the interests of one or more beneficiaries.”

Third, GT argued that the trust’s veil should be pierced, because the trust was administered as though the assets were held in “bare trust” for Sheikh Fahad. The Court rejected this argument, holding that a valid trust should not be pierced provided the trustee has not abdicated its fiduciary duties. Again, because the trustee acted as a fiduciary, the fact that Sheikh Fahad’s requests were always honored was insufficient to prove GT’s contention of a “bare trust”.

Fourth, GT argued that Sheikh Fahad should not continue to benefit from the trust following his fraudulent conduct—i.e., that the trust should be invalidated as a matter of public policy. Because the trust was validly created with “clean assets,” the court declined to invalidate the trust on public policy grounds.

Finally, GT sought to impose upon the trust a remedial constructive trust because of Sheikh Fahad’s misuse of the trust coupled with his substantial control. Again, because the trust was funded with “clean assets,” the court refused to apply a constructive trust (a notion foreign to Jersey law), because there had been no unjust enrichment of the trust at GT’s expense.

I believe that this case illustrates that, if formed and maintained properly, international APTs can, indeed, be quite effective. First, assuming no fraud against creditors at the trust’s inception, it can prove quite difficult to reach the assets of international APTs. Funding an international APT with “clean asset” and prior to any claims of creditors will go a long way (if not prove definitive) on the issue of fraud. Second, having an independent fiduciary who respects the trust agreement is vital towards upholding the integrity of a trust. In the illustrated case, even though the trustee always honored Sheikh Fahad’s requests, the mere fact that trustee did so in good faith was sufficient to deem the trust valid. Finally, even though Sheikh Fahad had defrauded GT out of $800 million, the Court refused to let these “bad facts” color its judgment, especially regarding GT’s public policy and unjust enrichment arguments—which I believe speaks volumes about judicial attitudes, in general, towards trust settlers in these trust-friendly jurisdictions.

If you would like to discuss this case or its implications on your international APT, please feel free to contact me at any time.
1. Of course, the opposite is true, as well. It’s important to note that, in an earlier case, the trustee had to return trust funds to GT that were directly traceable to Sheikh Fahad’s fraudulent conduct.