Offshore Asset Protection:
Transcending the Legal Quagmire
By Matt Blackman
Sunday, July 4, 1999 was to be the last day on earth for many humans according to the famous 16th century French astrologer Nostradamus. That was the day that famine, plagues, death and destruction were to be brought to us by the Four Horsemen as part of their apocalyptic duties. Nostradamus, credited with predicting such pivotal events as the Great Fire of London, the French and Russian revolutions, rise of Hitler, and assassination of John F. Kennedy, made hundreds of prophecies before his death in 1566. The fact that you are reading this article would seem to indicate that this latest prediction at least was somewhat flawed.
There have been similar proclamations about the future of offshore trusts in America in light of some recent court cases; they are kaput, useless, a waste of money. Esteemed by wealthy clients and specialists who have utilized them since early Roman times, the modern trust has been employed for myriad of uses, some of which have attracted the ire of the Internal Revenue Service. In fact, abusive trusts have become a major target such that any U.S. resident who has hidden behind a trust structure to reduce income taxes risks censure and incarceration by that agency.
In response to the onslaught of litigation, trusts have been increasingly used to protect assets and this industry has flourished in the last decade. In an effort to place assets out of reach from American courts, offshore trusts have been a favorite vehicle; accounting for more than $1 trillion of the assets now located offshore. Assuming tax neutrality, these structures were believed to be an acceptable way of protecting wealth for the lawsuit leery.
A number of recent cases, however, have thrown a wet blanket on the legal love affair between attorney and offshore trust. The most recent case of the Federal Trade Commission v. Affordable Media LLC, commonly known as the "Anderson" case, greatly increased lawyer apprehension of these entities, spawning concerns as to the reliability of offshore asset protection trusts (APTs).
Undoubtedly the decision finding the Andersons in contempt by refusing an order to repatriate the funds sitting in a Cook Island trust to the American court should concern client and attorney alike. It would appear that US judges are growing tired of hearing the argument that because assets no longer are in control of trust settlor, it is impossible to comply with a court order to satisfy a judgment, at least where fraud or other crime is involved or suspected. However, one (or two) judgments does not a law make and until a clear trend in this regard has been established, the jury is still out (pun intended) on the viability of the APT for U.S. resident clients. As Mark Twain once proclaimed upon reading a disturbing newspaper article about him, "Rumors of my death are greatly exaggerated." The same sentiments are being echoed by a number of attorneys after similar rumors have surfaced about trusts.
With that said, the growing number of books on the topic is testament to the trust's continued popularity, even in light of the ongoing battle between opposing legal camps. This provides testimony of the exigency to protect assets from lawsuit-happy clients who only have to make a phone call to launch an attack on an envied US target without spending so much as a dime, thanks to contingency litigation. Until this situation is remedied, the charge of asset protection will engender similar mechanisms, if not trusts themselves, to perform this requisite task at hand.
In the worst case that trusts are rendered ineffectual as an asset protection vehicle for US residents, they will continue to perform the task for non-US persons who are exposed to potential shotgun litigation in the US. Given the fact that so much US wealth is protected by offshore trusts, this worst case scenario is about as likely as the abolishment of the IRS. Come to think of it, that would be a fair trade!
Two books will be discussed in this column in an effort to address the needs of readers on either end of the legal spectrum. The first is aimed at the layman and the second was clearly written for the trust professional.
Attorney, Jim Bennett makes a very convincing case of the need for offshore asset protection trusts in modern day America in his book entitled Bulletproof Offshore Asset Protection -- The Money Fortress for the New Millennium. If not for the rights to the name held by IDG Books, his book could have been called Offshore Asset Protection for Dummies. Like books from the IDG Dummies series, Bennett's book offers simple explanations to make this complicated topic easier to understand with the aid of graphics, illustrations and flow charts. Offshore investment neophytes are treated to a personal experience of the author that makes it blatantly clear why anyone with assets should be nervous in today's litigious world. Without giving away the story, one disgruntled employee can potentially ruin the retirement plan for any professional or company owner.
Bennett discusses a number of outrageous lawsuits to drive the point home. He points out that going to court is a crapshoot and in some jurisdictions, such as Mississippi and parts of Los Angeles, for example, where wealth redistribution is a popular pastime. Juries have a history of awarding astronomical claims to the have-nots with assets plundered from those who have them. In many cases, this litigation lottery leaves defendants to watch helplessly as all their assets are taken from them faster than they can say 'corpus delicti!'
The book is broken down into four logical parts: the Problem, the Solution, the Details and Jim's Shameless Self-Promotion. Did I mention the fact that he is a lawyer who actively sells offshore trusts? The basics of offshore jurisdictions are aptly covered, as are the topics of banking, investing, taxes, trust control, and asset protection strategies.
For those who are contemplating a trip to your lawyer to investigate that merits of an asset protection program, the book will help you understand the legal jargon. If nothing else, it will save time spent in legal consultation. At $500 per hour, this saving alone could be substantial!
Milton Grundy is well known in offshore circles. He is author of Offshore Business Centres and editor of The OFC Report and Offshore Red. His latest work entitled Asset Protection Trusts -Third Edition is a more esoteric discussion of the topic and clearly written for the professional trust practitioner. Another notable difference between this book and Bennett's is that Grundy covers trust legislation and case law in a multitude of jurisdictions. As anyone who has been involved in a court case will attest, case law is the proof in the pudding so to speak. If a law is to be effective, it must survive in the courts.
A statistic is mentioned on the first page of chapter one that will disturb members of the medical and other professions. According to a study conducted for the US Government called Report of the Tort Policy Working Group on the Causes, Extent and Policy Implications of the Current Crisis in Insurance Availability and Affordability premiums for doctors practicing obstetrics and gynecology averaged 51.6% of their net income in 1985! Since that time lawsuits have skyrocketed. Surveys show that 19% of engineers and nearly half the lawyers in private practice in California carry no insurance.
Grundy et al show no bias for or against the use of offshore asset protection trusts. In the second chapter on bankruptcy, he states that "[t]he creation of an asset protection trust may, itself be an illegal act. A number of Federal criminal statutes exist which may be applicable to transfer of property by US citizens to foreign jurisdictions under certain circumstances." They include:
The broadening definition of "criminal conspiracy" by both state and federal governments aimed at those attempting to defraud creditors is more likely to elevate the issue from a civil to a criminal issue today. The Racketeering Influences and Corrupt Organizations Act (RICO) has drastically lowered the threshold for finding conspiracy, and even if criminal charges are not brought, treble the imposition of civil damages. "If asset protection trusts have real economic impact in the United States, future hostile legislation [and treatment in the courts] may well be anticipated."
The author breaches another potentially problematic issue in chapter 2. From a US tax prospective an irrevocable trust, to afford maximum protection from creditors, may also give rise to the obligation to pay a gift tax of as much as 55% on the transfer of assets into the trust. This may be possible to overcome by the use of a grantor trust but the rules governing trusts make it almost impossible to establish them in a truly irrevocable form, thus making the trust more vulnerable to attack from creditors.
In recent years, US courts have taken a very aggressive view in determining the rights and responsibilities of those who attempt to hide assets in foreign asset protection trusts. In Duttle v Bandler an American judge ruled that the fact a foreign trustee had advertised that it would not submit to American courts might be sufficient to bring that trustee within US jurisdiction. In Marine Midland Bank v Portnoy the existence of a foreign trust in Jersey was recognized but the US court held that because the debtor was within jurisdiction of the court, American domestic rules concerning the rights of creditors would take precedence over the rules governing the foreign trust based on a "balance of interests" theory.
These domestic challenges facing US residents wishing to protect assets using a foreign asset protection trust has not diminished in any way the increasing number of jurisdictions fighting to attract this business to their shores. Grundy covers thirty jurisdictions; most of them low or no tax nations and almost two-thirds of the book is devoted to legislation in these locales.
Asset Protection Trusts, although written before the outcome of the Anderson case, makes it clear what factors must be present to afford an offshore trust with a reasonable chance of surviving creditor attacks, and demonstrates where the Anderson's trust was structurally at fault.
Another factor is of paramount importance. It must also be clearly demonstrated that the trust was set up well in advance of potential claims. If proof exists that the settlor had any inkling of a problem lurking, even if beyond the visible horizon, the movement of assets into a trust risks being deemed a fraudulent transfer.
It is also interesting to note the number of offshore asset protection trusts that have been challenged where fraud has been committed. In most of the cases where trusts were penetrated, it was clear that some sort of fraud had been perpetrated. Certainly the Anderson case is no exception. Not only was fraud evident, but they had also acted as co-trustees and protectors of the trust, quickly resigning the trusteeship when trouble arose thus creating the impossibility of having assets returned to satisfy plaintiff demands. This clearly violates Grundy's third rule.
There is little doubt that anyone who claims with confidence that they can predict the outcome of a court case in the US must be considered suspect for even in the most clear-cut cases, outcomes are rarely predictable. As US trial attorney Mac MacPherson pointed out at a recent offshore seminar held in Vancouver BC, a verdict rendered in the Ninth Circuit Court could be ignored and a completely different verdict for a similar case reached in the Eleventh Circuit Court. Different judges also render decidedly different verdicts as well, often contradicting decisions reached by peers in the same district.
While there is little doubt that US courts have become more aggressive in dealing with offshore asset protection trusts, claiming these trusts ineffectual based on limited case law, especially as in the Anderson case where at least one cardinal rule was broken and fraud clearly evident, is unwarranted. On the other hand, failing to properly understand the changing sentiments regarding offshore asset protection trusts by the courts and Congress would be equally myopic, thus unnecessarily compromising a client's assets in the event the structure is tested.
Bulletproof Offshore Asset Protection --The Money Fortress for the New Millennium by Jim Bennett is written for the layman neophyte and intermediate offshore investor and trust client. Our rating is 8 out of 10.
Asset Protection Trusts - Third Edition by Milton Grundy, John Briggs and Joseph A. Field is rated for the advanced to professional investor and practitioner. Those not employed in a legal capacity will find this work somewhat dry but the effort is rewarded.
Our rating 8 out of 10.
Disclaimer: The views expressed are independent and the sole opinion of Matt Blackman who has not and will not receive financial remuneration from the publisher or author for this review. Although great care was taken in writing this review, the author cannot and does not guarantee the accuracy of information contained herein due to its complex nature. Readers are advised to obtain legal counsel before making any investment or estate planning decision.
Note: This column is dedicated to reviewing books on the subject of offshore investing and asset management. It is designed to provide an insight into the publications available to assist readers looking for the best information available for the money. If you have a comment or question about a review or have read written a publication of interest that you'd like to discuss, please contact me.
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