DATE:March 20, 2006The law with respect to our Offshore Asset Protection Trust (APT) practice continues to evolve as courts have occasion to adjudicate specific fact patterns.If the client’s asset protection planning is done properly, the client’s creditor, faced with “doubt as to collectibility,” will generally settle and the matter never winds up in a courtroom.In forming and maintaining an APT, the “rules of the road” must be followed to ensure the APT provides maximum protection as an asset and lifestyle protection device.For starters, unlike traditional domestic living trusts, the settlor/beneficiary of an APT cannot serve as a trustee.Equally important, the settlor cannot retain the ability to replace the trustees of the APT.As a recent case illustrates, having this ability can lead to disastrous results.In U.S. v. Grant (decided and affirmed in 2005), a U.S. District Court in Florida ordered the repatriation (a fancy word for the return of assets held in a trust offshore) of assets in two offshore APTs in order to satisfy the settlor beneficiaries’ federal income tax liabilities, which arose long after the APTs were formed.The Court’s decision was based on the fact that defendants retained the ability to replace the trustees of their APTs.In this case, Husband and Wife settled two offshore APTs in 1983 and 1984, well before having any liability claims or judgments against them.As Settlors of the respective trusts, H and W were given powers in the trust documents to replace trustees.In 2003, H and W had a $36M judgment entered against them for unpaid federal income taxes for tax years 1991 and 1993.H died in 2005 and W, by the terms of the APTs, became a beneficiary of both trusts.In its attempt to collect the judgment, the Department of Justice (DOJ) moved the Court to order repatriation of the assets held by the APTs.The Court sided with the DOJ and ordered the assets repatriated.In reaching its decision, the Court noted, “[T]he query must be: …does the beneficiary retain such control that she has the power vested in her in some way by the terms of the trust to repatriate the corpus?”The Court then looked to the APT documents, which gave W the “unreviewable discretion” to replace trustees, and therefore held that the Court could order her to replace the foreign trustees with a court-appointed U.S. trustee who could marshal assets to satisfy creditors.The important lesson one should take away from the Grant case is that, in forming an APT, the settlor/beneficiary cannot retain hidden control, including the ability to replace trustees.In ordering repatriation, the Grant Court relied on a single “string” of control between W and the assets of the trust—namely, W’s ability to replace the trustees. We have longed advised our clients regarding their asset protection planning, including the appropriateness of APTs and the specific provisions therein.Over time, changes in the law may dictate the need for you to update your asset protection plan.If you would like to discuss how the Grant case, or other recent developments in the area of asset protection planning, may impact your plan, please call Jeff Verdon at (949) 263-1133 to arrange a consultation.
It is important to note that this case is NOT a “fraudulent transfer” case, considering H and W funded the APTs nearly ten years before the tax liability arose.The key factor in Grant was not whether H and W transferred assets in defraud of creditors (they didn’t) but that W (a judgment debtor) had the current ability to repatriate assets (via her power to replace trustees).
JEFFREY M. VERDON LAW GROUP, LLP 18881 Von Karman Avenue, Suite 1650 Irvine, CA 92612 Toll-Free: (800) 521-0464 Ph: (949) 263-1133 Fax: (949) 263-1333 Advanced Estate Tax, Income Tax, and Asset Protection Planning E-Mail: jeff@jmvlaw.com The information contained in this website is intended to provide a general overview with regard to the subject matter covered and is not State specific. The authors, publisher, and host are not intending to provide legal, accounting, or specific advice.