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Asset Protection Trusts: Impact of Recent Case Duncan E. Osborne and Elizabeth M. Schurig

Recent cases have allowed a party to penetrate the trust. Lawyers can accomplish much for their clients if they plan within the guidelines of case law as opposed to ignoring or dismissing the results.

t least three cases lately, two found in civil contempt and jailed for fail- Duncan E. Osborne, J.D., is in federal bankruptcy courts1 ing to repatriate the assets. (See the side- the senior partner of Osborne, Lowe, Helman & and one in the Ninth bar on page 25 for a brief explanation of Smith, L.L.P. Mr. Osborne is Circuit,2 have found for the civil and criminal contempt.) The district the editor and a contributing party seeking to penetrate court agreed and on appeal the Ninth author of the four-volume treatise, Asset Protection: Athe asset protection structure. In response, Circuit affirmed. Domestic and the financial press has suggested that In Brooks,6 the debtor set up an asset International Law and these decisions have sounded the death protection trust in Jersey, Channel Islands, Tactics (Clark Boardman 3 Callaghan, 1995), updated knell for offshore asset protection trusts. a jurisdiction that honors self-settled quarterly. He is a fellow of Clients, however, continue to clamor for spendthrift trusts. The bankruptcy court the American College of protection planning, motivated by the in Connecticut, however, had no trouble Trust and Estate Counsel, an Academician in the continued concern about litigation lottery finding that Connecticut’s long-standing International Academy of and discouraged by the setbacks in tort public policy prohibiting its citizens from Estate and , and is 4 listed in Best Lawyers in reform. An analysis of these recent cases creating self-settled spendthrift trusts was America (Woodward/White, will reveal that offshore planning is still such a strong tenet that Connecticut law 1999). Elizabeth M. Schurig, available, and will guide practitioners should apply; thus, the assets of the trust J.D., is a partner of Osborne, Lowe, Helman & Smith, much more specifically as to what can and were available to the in L.L.P. Ms. Schurig practices cannot be done in the realm of asset pro- bankruptcy. Portnoy,7 a New York in the International Estate tection. bankruptcy case more complicated than Planning Section of the firm 5 and is board certified as a The Anderson case, has received the Brooks, also held that the law of the sett- specialist in the area of most attention. The Andersons, a Nevada lor’s domicile (in this case, New York law) estate planning and probate couple, were operating a telemarketing should apply rather than the law govern- law. She has written numerous articles and has venture that the Federal Trade ing the trust (observing in passing that lectured extensively in the Commission (FTC) attacked as a fraudu- “Jersey does not claim to have exclusive areas of domestic and lent investment scheme. The Andersons jurisdiction over its trusts”).8 international estate planning, trust, and estate had previously established a Cook Islands The media’s attention to the Anderson administration and probate. trust and were putting their ill-gotten case lies, in large measure, in the fact that She is a member of the Texas Academy of Probate and gains into it. The FTC argued that the the settlors were jailed—for six months— Trust Lawyers, and the Andersons were running a classic Ponzi for civil contempt. Proponents and advo- College of the State Bar of scam and that the Andersons should repa- cates of asset protection trusts have long Texas. Copyright © 1999 by Duncan E. Osborne and triate the proceeds from it. Furthermore, agonized, from their different perspec- Elizabeth M. Schurig the FTC moved that the Andersons be tives, over this potential threat to settlors.9

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Now there is a Ninth Circuit case holding that, in the proper circumstances, con- Contempt tempt and imprisonment are appropriate. Civil contempt is imposed solely to Asset protection lawyers must adhere to force the contemnor to do a particular the lessons in Anderson and not try to act, such as to turn over assets. The blithely dismiss it as “bad facts make bad contemnor must be released when he law.” It is a well-reasoned opinion and or she complies. reaches a proper result. It does not, how- Criminal contempt is punitive; the ever, signify the end for offshore asset pro- contemnor is sentenced and must tection trust planning. serve the term, much as in a criminal In the area of asset protection planning, proceeding. concerns about imprisonment were often answered by the principle that the defense to civil contempt is impossibility. very instructive. The Andersons were co- That is, an individual cannot be jailed for and protectors. It is axiomatic that failing to perform an act that is impossible the more control a settlor has, the less 11 to perform. Thus, if a defendant is asset protection he or she has. Indeed, ordered to do an act, but he or she cannot the only solid structure is one in which the comply (not will not comply, but cannot settlor cedes total control. The settlor comply), jailing for contempt will not lie.10 obviously should not be a trustee, co- The unanswered question is, “What if the trustee, protector, co-protector, or retain a defendant created the impossibility by his power to appoint a trustee or protector. All or her own action?” trustees and all protectors should be inde- Interestingly, in Anderson, the court of pendent and not subordinate to the will or appeals struggled with this issue, but did control of the settlor. In addition, no U.S. not resolve it. The court seemed to imply person or entity should fill those roles. that a self-imposed impossibility might not Otherwise, protection is sacrificed. be a defense, but avoided the question by Nor should the settlor maintain control determining that the Andersons could through some other device. For example, comply, and, therefore, the district court’s neither the settlor, nor a limited liability decision stood. (In fact, the court dis- company (LLC) or corporation controlled cussed the Andersons’ ability to control by settlor, should be the general partner in the trust at great length, and it was this a limited partnership, the interests of analysis that led the court to the conclu- which are in an offshore trust. A close sion that the Andersons could repatriate reading of the Anderson case will demon- the wealth.) strate that the court is not only persuaded, From Anderson flow several implica- but moved by the issue of control. From tions. Certainly, there is now precedent an asset protection planner’s perspective, for civil contempt and for the penalty of understanding the court’s analysis of con- confinement. There is also, at least in trol is as important as understanding that a dicta, a suggestion that a self-imposed settlor can be jailed for contempt. Settlors impossibility will not survive an attack. who want solid structures must be willing Finally, the creditors’ rights bar will be to forgo control. encouraged by Anderson (and by Portnoy Beyond the control issue and the con- and Brooks) and will not as quickly settle tempt issue, Anderson holds a lesson on cases where assets are in an offshore asset funding. Again, a close reading will reveal protection trust. the court’s focus on this issue. The court There are also, however, very helpful repeatedly mentions, and indeed seems and very valuable lessons for the asset preoccupied with the fact, that the protection bar. First, in Anderson, the Andersons put all of their wealth into an court’s focus on the Andersons’ control is offshore trust. Asset protection planners

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have long debated in toto planning versus racy. If claims, threats, or contingent liabil- nest egg12 planning. ities are uncovered, the lawyer is not One significant failing of the forced to halt planning, but reserves must Andersons’ planning was that they put all be set aside or measures must be taken so of their wealth into the trust. Not only that if the liabilities become liquidated, does that fact lend credence to the court’s they can be satisfied. conclusion that the Andersons retained Attorneys must also be prepared to control, but it will always help support a convince clients to forgo control. fraudulent transfer claim. In toto planning Typically, this is best done by the mainte- by definition brings a settlor to the very nance of a network of highly regarded margin of solvency. It is a foolish conces- trustees to whom clients can be referred. sion to the claimant to put the client at a Offshore trustees should be sufficiently zero net worth, thereby facilitating two capitalized, licensed, bonded, insured, vulnerabilities: and regulated to allay client concerns about loss or theft of wealth. In addition, 1. Charges of fraudulent transfer. settlors should meet with trustee candi- 2. An argument that the settlor still has dates to make their own inquiries and to control. establish relationships independent of their U.S. attorneys. A further lesson from Anderson concerns In toto planning should be approached There is now the use of a duress provision. A duress with extreme caution. Nest egg planning precedent for clause directs the trustee to refuse to where only a limited percentage of the civil make distributions to a if the client’s wealth is sent offshore will achieve contempt and beneficiary is under a court order to repa- several strategic goals. It will inevitably triate the trust assets. Conservative plan- help defeat a fraudulent transfer claim for the ners have maintained that putting this because the client will necessarily remain penalty of clause into the trust document will result solvent as to his or her U.S. assets, and it confinement. in enraging a judge and in gaining imme- will reduce the potential concerns of the diate judicial sympathy for the claimants.13 control issue raised in Anderson. That is, it Certainly Anderson bears out the merits of will be much easier for a court to believe those concerns. Duress clauses are a form that the client does not have control if the of lawyer trickery, and judges are not client is only giving up a percent of his or going to be patient with them. her net wealth as opposed to all of it. Finally, from Anderson, as well as Brooks Finally, if the trust assets are actually and Portnoy, it should be clear that timing physically offshore with the trust (and by is everything. Lawyers who do not engage that is meant the hard assets and not just in serious due diligence and who ignore the limited partnership interests), access pending claims, threats, and creditors— to the assets will be governed by the law not to mention fraud—not only jeopardize of the foreign jurisdiction, and U.S. in rem their clients’ plans, but they are playing jurisdiction will be impossible to obtain. professional Russian roulette. In Brooks, the assets were physically These lessons are helpful. With judicial located in the U.S. and easily reached.14 In guidance, offshore asset protection trusts Portnoy, they were offshore,15 and despite can and should be used. The plan begins the similarity of the reasoning of the two with meticulous due diligence, which opinions, and despite the finding against includes not only professional inquiry as the bankrupt in both cases, Brooks ulti- to the client’s reputation for business and mately lost, while Portnoy was still able to financial dealings, but also financial state- settle at reasonable figures (10¢-15¢ on ments and affidavits of solvency with pro- the dollar) because the creditor could not fessional inquiry to determine their accu- reach the assets.16

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It is submitted that the following plan purposes substantially support an argu- can and should be used, not as prohibited ment against a fraudulent transfer claim. by Brooks, Portnoy, and Anderson, but as Fraudulent transfer claims are all about guided by those cases to achieve asset the intent of the transferor. If the trans- protection. After due diligence, a limited feror’s intent is defensible, the settlor’s percentage of a client’s wealth should actions are necessarily legitimate. fund an offshore asset protection trust in Recurring motivations include interna- an export-the-assets structure.17 (In an tional diversification of wealth, anonymity export-the-assets structure, the entire with respect to wealth or certain assets, configuration is foreign as opposed to an tax planning (for example, to secure off- import-the-law structure, where wealth is shore private placement life insurance, to put into a domestic entity—a family lim- establish a dynasty trust, or to establish a ited partnership, for example—and the foreign non-grantor trust on the death of partnership interests are put into a for- the settlor), investing in funds not other- eign trust, but the hard assets remain in wise available to U.S. investors, pursuing the U.S.) foreign business opportunities, and The lawyer should assist the client in achieving foreign tax planning. Lawyers the selection of independent, highly rep- should not manufacture purposes, but fre- utable fiduciaries (trustees and protec- quent careful exploration of a client’s tors). All fiduciaries should be non-resi- goals and agenda will uncover companion dents and non-citizens of the U.S. The purposes to asset protection. “foreignness” of the structure is more Finally, the trust should be operated in enhanced if the custodian and the assets a wholly professional manner. The trustee themselves are foreign. The assets should should behave with due regard for its be kept in a foreign bank that has no U.S. duties and should, at all times, honor the presence (because a U.S. branch of the integrity of the structure. bank could be ordered to turn over the Communications with the beneficiaries foreign assets under penalty of contempt), should be circumspect, and a trustee and the assets should be invested in for- should not act on the whim or instructions eign securities (, bonds, and of a beneficiary regarding investments, deposits). distributions, or other aspects of the trust The trust provisions should include administration. The trustees, not the sett- distribution clauses that give total discre- lor and not the beneficiaries, are the deci- tion to the fiduciaries, i.e., distributions sion makers. These procedures will sup- are wholly discretionary. The trust should port lack of client control and avoid the be for the benefit of multiple beneficia- arguments that the trust is either a sham ries, including family members and or alter ego of the client. preferably one or more charities. The Lawyers can accomplish more for their trust should be irrevocable and contain clients if they plan within the guidelines comprehensive spendthrift language, a of case law as opposed to ignoring or dis- redomiciliation clause, provisions for missing the results. In that context, shifts in beneficial enjoyment, and no Anderson, Brooks, Portnoy, and Reichers are duress clauses. all extremely useful. ■ The trust should be part of an overall estate plan and should have purposes 1 In re B.V. Brooks, 217 Bkrptcy. Rptr. 98 (Bkrptcy. DC beyond asset protection. While the Conn., 1998); In re Larry Portnoy, 201 Bkrptcy. Rptr. 685 Reichers case18 stands for the proposition (Bkrptcy. DC N.Y., 1996). that asset protection planning as the sole 2 Federal Trade Commission v. Affordable Media, Inc., 179 F.3d 1228 (CA-9, 1999). This case is usually referred goal of an offshore trust is proper, addi- to as “the Anderson case” in asset protection circles and tional valid and appropriate reasons or will be referred to in that manner in this article.

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3 Symonds, “Offshore Trusts: Not So Watertight,” 11 See, e.g., Osborne, Asset Protection: Domestic and Businessweek 100, (7/26/99); Asinof, “Ruling in West May International Law and Tactics (Clark Boardman Callaghan, Chill Use of Offshore Trusts,” Wall St. J., 7/12/99, page 1995), §20:08. A24. 12 Osborne, Id., §20:07. 4 Glaberson, “State Courts Sweeping Away Curbing 13 Osborne, Id., §26:06. Suits for Injury,” N.Y. Times, 7/16/99, page A1. 14 Brooks, supra note 1. 5 Note 2, supra. 15 Portnoy, supra note 1. 6 In re B.V. Brooks, supra note 1. 16 Comments by Gideon Rothschild, Program Chair, 7 In re Larry Portnoy, supra note 1. “Ethical Considerations and Attorney Liability in Asset 8 Id. Protection Planning,” Ninth Annual Spring CLE and 9 Lee, “Offshore Asset Protection Trusts: Testing the Committee Meeting, American Bar Association, 5/15/98. Limits of Judicial Tolerance in Estate Planning,” 15 17 See Osborne, supra note 12, §20:04. Bankr. Dev. J. 451, (1999). 18 Reichers v. Reichers, 679 N.Y.S.2d 233 (N.Y. Sup. Ct., 10 See United States v. Rylander, 460 U.S. 752 (1983); Lee, 1998). In this case involving marital property, the asset Id. protection trust was not penetrated.

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