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Asset protection trusts: a legal and economic analysis of competing regulatory frameworks

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Asset protection trusts (APTs) are trusts that are designed to shield the settlor's assets from the claims of creditors. Normally, settlors look to take advantage of the legislative framework of APTs offshore (ie non-UK) since they provide a greater degree of asset protection than that available onshore (ie UK). This article provides both a comparative legal analysis of the legislative frameworks concerning APTs onshore versus offshore and an economic analysis, applying the Tiebout model (1956) on the optimal provision of local public goods to the same legislative frameworks. In order to understand the differences in legislative approach between the group of offshore countries and the UK, we have introduced by way of illustration a hypothetical case of an APT registered offshore where the creditors are looking to reach the assets of the settlor. We have used the laws of thirteen offshore jurisdictions – Bahamas, Barbados, Belize, Bermuda, the British Virgin Islands, Cayman Islands, Cook Islands, Dominica, Saint Lucia, Saint Vincent, Saint Christopher and Nevis, Turks and Caicos Islands and Jersey – as a baseline for comparison to the laws applicable within England and Wales. For purposes of this article, we have used a version of the Tiebout model for regulatory economic analysis. The point being that the most efficient regulatory regimes will be those that not only secure the most assets but also be ones where individual preferences are most likely to be maximally satisfied. Our argument in this article is based on a Tiebout model which requires three conditions to be satisfied: (i) perfect information; (ii) no externalities; and (iii) perfect mobility of actors. It is evident that offshore legislation in relation to APTs fails to satisfy one of the conditions, namely the absence of cross-border externalities, since the interests of onshore creditors are not reflected in such legislation. Our model suggests that because of unavoidable externalities, competition among offshore jurisdictions for non-resident settlors does not generate efficient laws and it also may imply that such competition can lead to a "race to the bottom". However, the problem of cross-border externalities may be mitigated by designing conflict-of-law rules such that interested parties, including the settlors and creditors, are aware of the risks undertaken ex ante. An examination of English conflict-of-law rules in relation to potential challenges of APTs reveals that, at least in bankruptcy situations, English law is likely to be applied, and thus, from a practical perspective, cross-border externalities are likely to be mitigated. That is, if the settlors know that English law is to be applied to APT challenges, they are less likely to engage in risky behaviour. Thus, the interests of onshore settlors will be by default reflected in the settlors' decision-making, mitigating the risk of cross-border externalities. One of the general results of our study is that whilst many jurisdictions claim regulatory arbitrage opportunities for settlor's assets, not all jurisdictions can have optimal efficiency in regulatory competition. Our analysis of the APT rules of thirteen offshore jurisdictions and England leads to the conclusion that maximal efficiency is gained by using English law for the benefit of creditors and that regulatory arbitrage opportunities are illusory.

Document Type: Research Article

DOI: http://dx.doi.org/10.5235/175214411794390002

Publication date: January 1, 2011

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  • Law and Financial Markets Review is a new, independent, English language journal devoted to providing high quality information, comment and analysis for lawyers specialising in banking and financial market issues and to others with interests in legal and regulatory developments affecting the financial markets. Published bi-monthly LFMR contains articles written by leading experts providing a forum for practical guidance on, as well as reflective and topical analysis of, all major jurisdictions, with a particular focus on the interaction between the law and market practice and behaviour.
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