Obstacles to enforcing foreign judgments in offshore trusts in Nevis, the Cook Islands, and Belize do not discharge liability, and recovery may ultimately be possible. The extent to which any of the above would be relevant would depend on the trust legislation in question and the facts surrounding any transfer. Additionally, the trust’s assets and the settlors and/or beneficiaries would normally be located abroad, and it would need to be established whether any particular foreign court could do anything about either.
Key Takeaways
- An overseas judgment on its own is not enough to overcome the protection of assets held in trust in a foreign jurisdiction, and special legislation may apply to recognize and enforce such a judgment against the trust assets in that jurisdiction.
- Local protection is generally geographically restricted. Proceedings brought by an individual in some other jurisdiction against some or all of the other individuals are not the same as proceedings that need to be commenced in this jurisdiction against those individuals who reside here.
- Separate consideration needs to be given to the Nevis (and Cook Islands) foreign judgment recognition provisions, compared with the recognition of trusts under the IBCA-Belize laws.
- All structures are designed around the specific needs of the individual, creating the trust, and the structures are arranged to meet individual goals and objectives in terms of timing and degree of control.
- Importantly, even when assets are held in offshore structures, a party can still face personal liability in proceedings such as those in the Anderson case.
- There is no relationship between the tax and disclosure duties of a trust and those of its settlers and beneficiaries and the location of the trust.
What Does Enforcement of a Foreign Judgment Mean?
A foreign judgment is a judgment in a ‘foreign’ jurisdiction, i.e., outside the jurisdiction in which relief is now sought by a party. The term ‘foreign judgment’ is used to denote recognition of a foreign judgment and enforcement of a foreign judgment (for the purpose of a monetary award) by paramount action.
Mr. Creditor obtains a money judgment in Country A against Mr. Debtor. Unbeknownst to Mr. Creditor, Mr. Debtor had transferred his investment portfolios to a trust in Country B some time prior to the judgment. Will the judgment enable Mr. Creditor to seize investment portfolios in Country B held by the trusts?
Several questions then arise, such as whether Country B’s courts recognize the foreign judgment. Who would be the legal owner or parties to the challenged investments? Can the creditor challenge the investments, and if so, would they be in the name of the bank’s local Country C branch, requiring the creditor to get involved in another country's legal affairs?
Again, restrictions on enforcing foreign judgments do not necessarily mean a new claim would be denied or unsuccessful.
This article focuses on civil creditor claims to recover offshore trusts. Criminal confiscation and associated matters, including the imposition of sanctions and information sharing by government, are considered to be outside of the scope of this article.
How Offshore Trust Laws Limit Foreign Judgment Enforcement
A trust is set up by a settlor and involves a trustee or trustees managing assets within the trust for the benefit of the beneficiaries or for some other lawful purpose. Whether or not a trust can be seized by a creditor of the settlor will depend on more than the title of the trust deed.
Offshore legislation can, in many cases, determine which laws apply to trust matters and limit the scope of foreign judgments. In addition, such legislation may contain provisions designed to prevent the particular foreign laws of a certain jurisdiction from overriding the trust laws of the jurisdiction in which the legislation is applicable (trust firewall).
For someone setting up structures, three issues are relevant at this stage:
- Which judgments and claims does the legislation cover?
- What remedies remain available under local law?
- Which parties, assets, or entities are caught by court proceedings brought in a foreign jurisdiction?
Even if only one of the primary interests of the contributor is dealt with in the first point, a good analysis of structures for these purposes also has to deal with the other two points.
Nevis, the Cook Islands and Belize: How the Rules Differ
For reference, a comparison of these structures should start with the applicable rules and the corresponding conditions for qualification, rather than an attempt to determine which is superior.
Nevis: Foreign Judgments and Local Creditor Claims
According to the Nevis Financial Services Regulatory Commission, a foreign judgment against an international trust qualified as an offshore trust in Nevis will not be enforceable in Nevis and must be pursued as a civil recovery claim in the Nevis courts within a specified time frame.
The growth of restrictive fraudulent-disposition rules as well as the demanding evidentiary standard imposed upon creditors in order to establish a claim in Nevis against a trust, as compared with mere presentation of a foreign judgment in order to establish a local claim, are also important considerations.
Qualification of the foreign trust to the Nevis laws regarding international trusts will depend on several factors, including the trust’s residence, the trustees, and the property (including land) that the trust possesses. However, an international trust where a beneficiary has control of the trust assets or where a settlor can dissolve or amend the trust within Nevis may not be considered an international trust for purposes of Nevis’ laws.
A determination of whether a trust and/or proposed transfer shall be protected by a jurisdiction is a question of fact. Such determination is based upon the applicable legislation and the particular facts and circumstances surrounding the proposed transfer. There must be verification against the applicable legislation of the amount of the bond and time for filing of such bond as compared with information supplied in a generic comparison.
Cook Islands: A Statutory Barrier With Defined Scope
A regulatory assessment of the foreign judgment provision (Section 13D) of the International Trusts Act has been undertaken for the purpose of this report and reproduced here. Essentially, the restriction on recognition and enforcement of foreign judgments is confined to such judgments made in a matter to which the relevant provision(s) do not apply or a matter in which a trust is governed by the laws of the Cook Islands.
While the phrase “all foreign judgments are irrelevant” would give less detail, the critical elements are the extent of restriction imposed by the legislation, the legislation dealing with trusts in relation to restriction imposed by that legislation, and local remedies that are available.
Advise the settlor as to the laws of the jurisdictions in which the trust and its assets are to be transferred and as to the challenges to such transfer and the time frame in which such challenges must be made. The time frame for challenges in the Cook Islands can be short.
Belize: Protection Through Trust-Validity Rules
Belize is treated differently under Section 7(6) of the Trusts Act. Section 7(6) applies to claims made under the laws of a foreign jurisdiction or under a foreign court order relating to marriage, succession, or a claim being made in an insolvency. Section 7(7) states that this section has effect notwithstanding certain other sections of the Trusts Act as specified.
The statute, in addition to grounds for the invalidity of a trust generally, sets out circumstances where a trust will be considered to be invalid, such as where it is established for an unlawful activity or with defective creation provisions applying to international trusts where registered.
Section 7 cannot be read as always conferring immediate protection to a claim against a trust’s assets. It is a matter of the claim itself and of the circumstances affecting the trust’s registration in the relevant country and its validity and of any relevant foreign proceedings.
Claims asserted against a transfer, a settlor, or trust assets situated outside of a jurisdiction in which a claim is brought need to be analyzed in the jurisdiction in which the claim is brought. This would involve an analysis of the claim as well as the registration and validity of the trust in the foreign country as well as any foreign proceedings.
Comparison at a Glance
| Issue | Nevis | Cook Islands | Belize |
| Main point to examine | Restrictions on foreign judgments against qualifying international trusts | The scope of section 13D | Section 7’s treatment of specified foreign-law claims |
| Creditor analysis | Grounds and conditions for a fresh local claim | Statutory coverage and available local proceedings | Claim category, validity and registration |
| Practical limit shared by all three | Proceedings involving people or property elsewhere need separate assessment | Proceedings involving people or property elsewhere need separate assessment | Proceedings involving people or property elsewhere need separate assessment |
For a broader discussion of the first two jurisdictions, see our Nevis Trust vs Cook Islands Trust comparison.
What Creditors and Courts May Still Be Able to Do
While these limitations may still present some risk to the settlor, the risk can be analyzed in several different ways. For example, one could analyze the risk presented by personal court orders against the settlor and try to transfer proceeds of sale to an offshore trust and the risk presented by the location of property abroad and potential challenged transfers of that property.
Orders Against the Settlor and Contempt of Court
The ability of a court to order someone to do something is generally separate from the ability of that court to enforce a judgment against a foreign trustee in a proceeding in the US.
Even when all the available funds have been distributed, in proceedings here a person may be required to repatriate assets to this country and may be found in contempt of a domestic court’s orders if he fails to do so. The consequences of contempt, however, will depend on the terms of the order, on the ability of the settlor to comply with the order with assets abroad, and on the findings of the court here.
A duress clause is not a guarantee that a settlor can escape his obligations under a trust deed in relation to a domestic court order. Advice should be obtained from the trust jurisdiction and from the jurisdiction in which the proceedings were issued.
Challenges to Transfers and Retained Control
A creditor can challenge a transfer to avoid a judgment being recognized.
The same difficulties exist with respect to the period for challenging transfers and the problems of retained control in a foreign jurisdiction. For example, the US bankruptcy laws with respect to the avoidance of transfers in bankruptcy at 11 USC §548(e) provide for a period of 10 years with respect to certain transfers of a debtor to his or her own trust (and the debtor’s status as beneficiary and the debtor’s intent to hinder, delay, or defraud a creditor).
Note, however, that a ten-year claim back by a US trustee to upset a transfer by a debtor to a trust (even outside the US) is a separate matter from establishing a claim in a foreign jurisdiction and recovering property across borders.
A useful review of the deeds would include consideration of who actually makes decisions in practice, a review of the extent to which the trustees are independent of the settlor, a review of the reserved powers of the settlor, and a review of the administration records in place to see how the arrangement actually functions under the terms of the deed.
Assets and Distributions Outside the Trust Jurisdiction
An offshore trust does not have to move all of your assets to the jurisdiction where the trust is governed by the terms of the trust deed.
Further, shares in property holding companies are not transferred to the trust jurisdiction; a building remains in the same location. Further questions remain regarding bank accounts: who the account holders are, the bank's name, and the legal processes.
A thorough assessment of the relevant jurisdiction for each individual asset is the most effective approach—a property-by-property review to identify the relevant property, its owner, its location, and the institutions involved.
Distributions also need to be reviewed separately to ensure all protections are maintained by the trust while the funds are under the control of the trustee and distributed to a beneficiary.
All of these factors must be considered when deciding whether to set up an offshore structure and which jurisdiction to establish it in.
A Real Case: What Affordable Media Shows About Trust Protection
The Anderson case is used here to illustrate how personal court orders and offshore recovery proceedings are developed separately.
In June 1998, the personal conduct of Michael and Denyse Anderson was the subject of a Federal Trade Commission (FTC) announcement. The couple were found in contempt for failing to remove $1.3 million from an offshore trust and were sentenced to jail time.
The later recovery history for the Andersons comes from a December 2002 settlement by the FTC with AsiaTrust Limited, the Cook Islands’ trustee for the offshore trust established by the Andersons. Some $1.2 million was released from the trust by the trustee following litigation in the Cook Islands in which the trustee was a party.
A settlement (not an execution) of a US judgment registered in a local court. This debunks the myth that assets in offshore trusts are always beyond a private creditor's reach.
It is worth noting that this was an investment fraud case, so not all private creditor disputes will have any benefit from the case. However, this case makes clear that even when direct enforcement is not possible, the parties’ personal liability and the availability of alternative proceedings to recover any debt are not affected by such barriers.
What to Check Before Funding an Offshore Trust
Before choosing a jurisdiction for your offshore trust structure, gather information and complete a checklist of assets, people, and potential claims. Your offshore structures advisor can then recommend the most suitable structure for you based on your needs.
- Claims and obligations: Any outstanding litigation, demands, guarantees, and insolvency matters.
- Transfer history, including full details of all previous transactions and all parties involved. Ownership of the property or asset and proposed dates for funding the trust structure and its intended purpose.
- Asset location: The location of the assets to be placed in the offshore trust, including bank accounts worldwide and assets held in the name of banks, custodians, companies, etc. Are any of the above to be involved in the structure?
- How much can the settlor(s), the trustee(s), and the beneficiary(ies) decide prior to the creation of the trust structure? How can the trustee(s) be appointed and removed? What investment powers shall the trustee(s) have? Can a trust be revoked by the settlor(s)? How are distributions to be made?
- Administration: Are the trustees a regulated entity? Are adequate records kept? Communication between Settlors, Trustees, and Beneficiaries. How are disputes to be resolved?
- Total establishment cost of the trust, as well as ongoing annual administration costs, bank charges, etc. Also, cost of any anticipated litigation.
- Tax and reporting requirements of the settlers, trustees, and all beneficiaries, including Foreign Trust reporting requirements, to include completion of Forms 3520 and 3520-A as well as other information returns such as a completed Form 3520-C.
- Refer to Foreign Trust reporting requirements, i.e., Forms 3520 and 3520-A, and other information returns (e.g., Form 3520-C, etc.). Income of a grantor trust is reported on the US owner’s return for income tax purposes (capital gains tax and/or inheritance tax in the offshore jurisdiction in question, and registration requirements for the settlor(s), trustee(s), and beneficiary(ies) as to their respective interests and in which country each resides).
- It is also recommended that all income tax, capital gains tax, and inheritance tax, together with any registration requirements for settlors, trustees, and all beneficiary(ies) are outlined where the main structure is set up offshore, and all parties involved in the structure are resident elsewhere.
- Note that while great care is taken to ensure confidentiality in the establishment of structures, privacy and secrecy are two different things. In respect of FSC-registered Belize trusts, the disclosure of the beneficial ownership to the relevant structures, recording thereof, and to the applicable regulators as mandated by the FSC’s guidelines would need to be ascertained from the applicable service providers and institutions, etc. Structures are not secret!
See Foreign Trust reporting requirements to include Forms 3520 and 3520-A as well as other information returns such as a completed Form 3520-C. Income of a grantor trust is reported on the US owner’s return.
You should also check for income tax, capital gains tax, and inheritance tax with any UK structure set up offshore and registration requirements of settlor(s), trustees, and beneficiary(ies) in relation to their respective interests and the residence of them.
Again, while confidentiality is an important consideration, privacy is another matter entirely. The disclosure of beneficial ownership for FSC-registered Belize trusts needs to be identified, recorded, and disclosed to the relevant regulator under the FSC’s guidance. Structures are not set up in complete secrecy, and all service providers and other authorities will need to know the underlying parties to the structure.
Summary: Protection Depends on More Than the Trust’s Location
While Nevis, the Cook Islands, and Belize have enacted laws to prevent the enforcement of certain claims against a trust in foreign jurisdictions or under the laws of a foreign jurisdiction, it is important to note that each of these laws has its own unique scope and requirements that must be satisfied as a precondition to denial of enforcement or of application of foreign law.
All of these factors would need to be considered in assessing the risk of foreign enforcement and, in particular, the risk of local enforcement barriers.
Please contact Q Wealth to discuss your objectives for setting up an offshore trust and the jurisdictions involved. It is important to obtain coordinated legal and tax advice in the trust jurisdiction and the countries connected to you and your assets prior to funding the structure.
