If you think your overseas trust will place your assets beyond the long arm of the law, think again.
A court case that has raised some eyebrows among experts in the field shows that U.S. authorities have plenty of weapons in their arsenal when it comes to reeling in assets from foreign havens.
As reported in a previous
Global Tax Forum, there's no tax benefit to setting up an overseas trust. The main reason you would even consider one is for asset protection. Though not foolproof, an overseas trust can definitely slow your creditors down.
By putting your assets into a trust governed by a non-U.S. jurisdiction, any lawsuits your creditors file against you in the U.S. will be useless. That will force your creditors to file additional lawsuits in the jurisdiction where you set up your trust. And most likely, they won't want to deal with that.
But when law enforcement authorities are after those assets, it's another story entirely. And a San Diego couple found that out the hard way, spending time in jail for contempt of court when they failed to bring their overseas assets home.
The case began in April 1998, when the
Federal Trade Commission
filed a complaint against the promoters of a business offering the opportunity to invest in 30-second, late-night TV commercials peddling such products as water-filled dumbbells and talking pet tags.
According to published reports, the FTC considered the enterprise to be a classic
-- or pyramid -- scheme in which early investors are paid off with money from later investors.
After a preliminary injunction hearing in May, U.S. District Judge Lloyd D. George ruled that the FTC's complaint was likely to succeed and he froze the assets of the defendants.
But before the FTC case was filed, two of the defendants, Denyse and Michael Anderson, had placed significant assets -- $1.3 million as it turned out -- in a Cook Islands trust. The Cook Islands, a former possession of New Zealand, have some of the most comprehensive asset-protection legislation in the world.
When ordered by Judge George to repatriate their assets, the Andersons asked their co-trustee,
in the Cook Islands, to return the money, but the co-trustee refused.
The trust had an antiduress clause, which prohibited the co-trustee from giving up the money because of any "order, decree, or judgement." Frankly, that's the point of these overseas trust -- you're putting the money in someone else's control so your creditors can't get to it.
But Judge George rejected the Andersons' claim that the money was beyond their reach, a decision later upheld by an appeals court. The courts determined that the Andersons had the right to decide what constituted an event of "duress."
The couple was jailed for several months on a contempt of court charge, and was released in December 1998 after signing papers authorizing release of the money to an FTC-controlled trustee, according to published reports. It's not clear whether the funds have yet been repatriated.
So what can we learn from the Andersons' experience? Two things:
Though your assets may be out of the court's reach, you might not be. A judge will still evaluate your motives in setting up the trust. It's all about knowledge and intent, says Charles Vallone, a partner at
Frankel Loughran Starr & Vallone
, a financial advisory firm in New York. A judge could wind up determining how much of either you have when establishing your trust.
If you're really in it for asset protection, relinquish as much power as possible, advises Peter Spero, an asset protection attorney in Santa Monica, Calif. In the Andersons' case, the courts didn't believe that the Andersons had no control over their money, noting that the couple had previously obtained $1 million from the trust at one point to pay a tax liability.
"This is a situation where people who created a trust retained too much power in the trust," Spero says. "If the trust was set up with an impossibility to get at the funds, they would not have been held in contempt."
Perhaps. But Judge George's decision sends out a powerful message that you can't use foreign asset protection trusts to hide money from Uncle Sam.
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TSC Global Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.