Limitations of the Offshore Asset Protection Trust

The settlor of the trust may transfer to the trust patrimony the various personal property he wishes to protect. Since he is the sole beneficiary, transfers of property to the trust can be tax-free by tax rollover unless he decides to make the transfer at market value.

Among the most frequently transferred assets are primary and secondary residences, non-RRSP investments and vehicles (cars, boats, motorcycles, etc.). With respect to a principal residence, there is no payment of real estate transfer fees when transferring to an Asset Protection Trust and it remains possible, subject to compliance with certain conditions, to benefit from the principal residence exemption where the residence is held in trust.

More than one wonders about the effectiveness of the protection provided by this type of trust in the event of the beneficiary’s death. According to various authors, it appears that the property held in trust must be returned to the estate so that the creditors could then exercise their right of seizure. It is, therefore, apparently, a weakness of this kind of trust, since the death of the sole beneficiary results in the termination of the trust. It would also seem possible for a creditor, at least in theory, to seize the beneficiary’s interest in the trust. However, various clauses in the Trust Indenture could help reduce this risk. 

At this point, an important finding is necessary if we draw a parallel between the Asset Protection Trust and the Family Trust. Since the Family Trust provides for various beneficiaries, the death of a beneficiary does not result in the termination of the trust, so that the creditor of the deceased beneficiary cannot exercise the right of the attachment. Since the beneficiary right is subject to the discretion of the trustees, the creditor would also have no right to seize. Curiously, despite its name, the Family Trust offers better protection. So why would we still want to use an Asset Protection Trust? Simply because it allows a rollover when transferring the assets to be protected to the trust and is not subject to the deemed disposition rule applicable every 21 years.

Time To Build An Asset Protection Through Offshore Trust

The asset protection trusts are a popular vehicle that can generally protect an individual’s assets from creditors and potential litigation. How? Read my response here.

An Asset Protection Trust must be formed when all is well, the amount of indebtedness of the individual is less than the value of its assets and the transfer of assets to the Asset Protection Trust does not render insolvent the particular.

Limit of protection against creditors

In asset protection, the debtor’s interest in protecting his assets as opposed to the interest of the creditor, which is to be paid for his goods or services. The Asset Protection Trust does not allow you to protect your assets against your current creditors.

The Civil Code, although it allows a person to dispose of his property for free, including the formation of a trust, also provides protection for its creditors. Inopposability and oblique action are the most used remedies in this area.

The action in unenforceability allows a creditor, if he is prejudiced, to have his claim declared invalid against the legal act that his debtor does in fraud of his rights. The legal action is therefore annulled, not only with regard to this creditor but also with regard to the other creditors. These creditors can then seize and sell the property that is the object.

The oblique action provided for in the Civil Code of Qu├ębec states that the beneficiary of a trust has the right to demand the benefit of a benefit granted to him for the trust deed and is entitled to receive capital or income from the trust. If the beneficiary of the trust does not exercise his rights while he is a debtor, his creditor may require the trustees to remit to him the part of the income or capital that the beneficiary fails to demand.

Solidary liability provided for in the Civil Code

Under the rules of the Civil Code, the trustee, the settlor, and the beneficiary are, if they participate, jointly and severally liable for the fraudulent acts of the creditors’ rights of the settlor or the trust patrimony.

Bankruptcy and Insolvency Act

The Bankruptcy and Insolvency Act provides limitations on the debtor’s rights to transfer assets. Several recourses in unenforceability are open to the trustee, in particular when the transfer of the property is made in favor of related persons or for consideration less than the fair market value of the property at the time of the transfer.

Other laws

Other laws also provide for limits on creditor protection. We can think of subsection 160 (1) of the Act, which provides that a taxpayer who has received property from a person with whom he or she does not deal at arm’s length may, in certain circumstances, be jointly and severally liable for the payment of the tax due by the taxpayer. this person if he has paid insufficient consideration on the transfer.

In addition, in matrimonial matters, an injured spouse may apply for an unequal division of the net worth of the family patrimony if the other spouse has squandered property or is in bad faith.

summary

We discussed the fact that the Asset Protection Trust is a means of protection, yet it is not foolproof and has its limits of protection.

As a general rule, what is important to understand is that the creation of the trust and the transfer of the assets to be protected must be done when everything goes well, in a period of solvency. Limits on the protection of assets by trust defeat the fraudulent acts of debtors who would like to subtract their assets from creditors’ seizures. There are a number of different situations that could defeat the protection of assets by a trust, namely the invalidity or non-existence of the trust and the insolvency at the time of the transfer. The creation of trust has several advantages and disadvantages, in addition to uncertainty about the protection of property. It is therefore essential to plan well for imponderables. We can help you determine if this particular vehicle is right for you.