The economic upheaval caused by the pandemic has forced persons to focus on asset preservation. The desire to protect wealth and business assets in a well-run, regulated and safe jurisdiction has led to a marked increase in business for the financial sector in places such as the Cayman islands. Traditionally, asset protection has meant to create a strategy to permit an individual or businesses to limit creditors’ access to assets in accordance with applicable debtor/creditor laws. Over the years, the protections afforded by offshore trusts and foundations have become more sophisticated with a broader range of protection mechanisms available.
A trust is established by a settlor placing assets under the control of a trustee to hold for certain persons or to carry out specific purposes. A foundation company (FC) is formed by a founder who incorporates the FC and then transfers property to it to be managed by a board of directors. Thus, legal title to the property is transferred to the trustee or the FC such that the property is no longer a part of the personal estate. Cayman law does allow the settlor to retain a considerable amount of control over the management, investment and distribution of the trust property and the founder to sit on the board of directors to continue to influence decisions.
If the settlor of the trust or the founder have existing creditors, then creditor protection may be at risk. Under the Fraudulent Dispositions Law, to defeat a transfer of property to a trust or foundation on the grounds the creditor was defrauded, the creditor must show 1) the transfer was made at an undervalue (such as a gift or at a significant discount) and 2) the transferor did so with an intent to defraud (intent of transferor to put or try to put assets beyond reach of creditors). There is a six year limitation period to contest the transfer.
Another difficulty for creditors is the publicly available information about the trusts and FCs. Trust documents and information they contain do not appear on any register in the Cayman Islands. The trustees are bound to keep the affairs of the trust and all personal information relating to the beneficiaries confidential. Under the law, a beneficiary’s access can also be restricted. The only publicly available information of a FC is the date of incorporation, the company number, whether it is active or dissolved, the address of tis registered office and the name of the current directors.
Creditors need to be aware of the asset protection devices available during this pandemic. The Cayman Islands is one example how a well-established and safe jurisdiction can be utilized and what information and legal principals are available to creditors to overcome illegal asset protection practices.