USA - Notes on offshore trusts

2010/04/19
1. COOK ISLANDS 2. ASSET PROTECTION NEUTERED 3. FOREIGN ASSET PROTECTION TRUST CASES
COOK ISLANDS Offshore trusts are receiving far more media attention than they did in the past. And much of the media attention is negative. Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands. The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City). The islands are known mostly for tourism. They contract their national defense to New Zealand, which is four hours away by plane. Yet the Cook Islands have a thriving international trust business.

Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection. He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors. There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.

Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law. He explains that the latest among them is Jamie L. Solow. Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud. U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust. This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection. Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust. It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit. Many of the asset transfers occurred after the jury rendered its verdict. As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.

An offshore trust can be an appropriate part of an asset protection plan. But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.

NEUTERED TRUSTS

Asset Protection Trusts Neutered

by 2005 Bankruptcy Reform Act

The 2005 changes to the Bankruptcy Code provide for what amounts to a 10-year clawback of transfers to self-settled trusts that are meant to hinder, delay, or defraud creditors. Since most FAPTs are set up for this very reason, such clawbacks may be automatic in many cases. At the very least, all transfers to an asset protection trust will be susceptible to being set aside for up to 10 years prior to the date that a bankruptcy petition is filed.

Some critics of foreign asset protection trusts might contend that this change was unnecessary, since foreign asset protection trusts had always failed in bankruptcy anyway. FAPTs may still be useful in very limited circumstances, such as for planning with international families or pre-immigration planning.

Caution that to avoid the stigma of the numerous cases where FAPTs have failed, some promoters have started giving them different names to try to disguise their character. Whether this disguise is meant for the court or their prospective customers is not clear.

FOREIGN ASSET PROTECTION TRUST CASES

The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results. Additional and substantial information relating to each case is available by clicking on the links.

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In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.
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Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”