What Are the Benefits of Labuan Trust From the Aspect of Asset Protection Trust?

What Are the Benefits of Labuan Trust From the Aspect of Asset Protection Trust?

We all know that Labuan is a separate territory and freeport within the Federal Territory of Malaysia off the coast of Sabah. It first enacted Offshore Trust Act 1996 which took bits and pieces from old laws of other jurisdictions such as Cook Island Law and also contains provisions similar to Belize asset protection trust law.

In this article we would be outline the three(3) major benefits of Labuan Trust from the perspective of Asset Protection.

The first benefit would be that Foreign claims or foreign judgments are effectively unenforceable. In order for an offshore trust to be liable to satisfy a creditor’s claim out of trust property, it must be proved beyond reasonable doubt that the said trust was created in Labuan, properties were disposed into such offshore trust with the principal intent to defraud the creditor of the settlor.

Labuan Trust Act 1996 in its Section 10 explicitly states its unenforceability of foreign claim or judgment, whereby the Section is worded as such:-

Unenforceability of foreign claim or judgment.

  1. (1) Where a Labuan trust is validly created in accordance with or as provided by this Act, the Court shall not vary it or set it aside or recognize the validity of any claim against the trust property pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect of-

(a) the personal and proprietary consequences of marriage or the termination of marriage;

(b) succession rights, whether testate or intestate, including the fixed shares of spouses or relatives;

(c) any claims or orders of court with regard to matters referred to in paragraph (a) or (b) in reference to the personal laws of the settlor or the beneficiaries;

(d) the claims of creditors in an insolvency subject to the provisions of section 11;

(e) any claims with regard to the validity of any transfer or disposition of property into the Labuan trust;

(f) any claims with regard to the capacity of the settlor; or

(g) any claims by reason that the laws of any foreign jurisdiction prohibit or do not recognise the concept of a trust;

We do know that the administration of an offshore trust is in most respects no different from the administration of an onshore trust. However, if the settlor’s principal intent is asset protection, which the crux of this article, that the challenge to the trust may come from third parties rather than from beneficiaries. This will mean there are often additional issues to take into account such as the fraudulent disposition, which sometimes also called as fraudulent transfer. So here comes the Second benefit which is its fraudulent disposition clause which is attractive to parties seeking to protect assets from the claims of judgment creditors through the use of OFC (Offshore Financial Centre) such as Labuan. Section 11 of the Labuan Trust Act 1996 explicitly touches the point of ‘fraudulent disposition’ whereby it is stated as below:-

Fraudulent Labuan trust or disposition.

  1. (1) Where it is proved beyond reasonable doubt, the onus of which is on the claiming creditor, that a Labuan trust created or registered in Labuan, or property disposed of to such a Labuan trust-

(a) was so created or registered or disposed of by or on behalf of the settlor with principal intent to defraud that creditor of the settlor; and

(b) did, at the time such creation or registration or disposition took place, render the settlor, insolvent or without property by which that creditor’s claim, if successful, could have been satisfied, then such creation, registration or disposition shall not be void or voidable and the Labuan trust shall be liable to satisfy the creditor’s claim out of the property which but for the creation, registration or disposition would have been available to satisfy the creditor’s claim and such liability shall only be to the extent of the interest that the settlor had in the property prior to the creation, registration or disposition, and any accumulation to the property, if any, subsequent thereto.

(3) A Labuan trust created or registered in Labuan and a disposition of property to such trust shall not be fraudulent as against a creditor of a settlor-

(a) if its creation or registration, or the disposition, takes place after the expiration of two years from the date that creditor’s cause of action accrued; or

(b) if its creation or registration, or the disposition, takes place before the expiration of two years from the date that creditor’s cause of action accrued and that creditor fails to commence such action before the expiration of one year from the date of such creation or registration, or disposition.

Essentially, we can conclude that a trust shall not be fraudulent as against a creditor or a settlor if the trust settlement takes place after the expiration of two years from the creditor’s cause of action accrued or if the settlement into the trust takes place before the expiration of two years from the date that the creditor’s action accrued and that creditor fails to commence such action before the expiration of one year from the date of the creation or registration or disposition. So there would be no fraudulent disposition of assets and trust if the settlement took place before the creditor’s cause of action against the settlor accrued or had arisen.

In addition, a settlor of an offshore trust can expect to meet an increased level of disclosure as to identification, sources of wealth, and business activity as part of the establishment and ongoing administration of an offshore trust. In which here it comes to third benefit of the Labuan Trust whereby it provides secrecy to the settlor. Section 8 of the Labuan Trust Act 1996 clearly touches on this point whereby it is stated as follows:-

Secrecy.

8A. (1) Subject to subsection (3), no person who has by any means access to any record, book, register, correspondence, document, material or information, relating to the business and affairs of a Labuan trust shall give, divulge, reveal, publish or otherwise disclose to any person such record, book, register, correspondence, document, material or information.

(2) All proceedings (other than criminal proceedings) relating to a Labuan trust commenced in any court under the provisions of this Act and any appeal therefrom, shall, unless the court otherwise orders, be heard in camera and no details of the proceedings shall be published by any person without leave of the court.

As a conclusion, the Labuan Trust retains unique advantage for the settlor of an offshore asset protection trust. After this, we would be discussing Labuan Foundation and also Asset Protection Laws from other jurisdiction around the world.

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