If you do any serious reading about offshore trusts, you will find two main schools of thought: 1) offshore trusts are the best way to asset protect your assets and 2) offshore trusts are dead due to the contempt of court ruling recently handed down where clients have been sent to jail for not returning assets from their offshore trust to the U.S. to satisfy a judgment.
It is the APS™ opinion that offshore trusts are not only still viable if set up correctly, but they are the best way to protect certain assets. Too often people using offshore trusts are doing so because they know of an impending problem. If that is the case, we believe contempt of court is a real live consequence a client needs to worry about. Additionally, if an offshore trust is set up to give the client too much control (like the power to bring assets back to the U.S.), then again we think contempt of court is a real live consequence the client needs to worry about.
What is Contempt of Court?
Contempt of Court is defined as: “[a]ny willful disobedience to, or disregard of, a court order or any misconduct in the presence of a court; action that interferes with a judge’s ability to administer justice or that insults the dignity of the court; punishable by fine or imprisonment or both.”
Everyone by now has seen a TV court drama where someone (either attorney, client, or witness) does something to upset the court, and the judge yells out for the person to stop or they will be found in Contempt of Court.
In the offshore area, contempt revolves around a judge telling a debtor (after a money judgment is rendered for the plaintiff (now creditor)) to bring back money from a foreign asset protection trust set up by the debtor and the debtor refusing or claiming a defense to being able to perform the act the judge has requested.
What defenses are available for contempt?
Impossibility of performance (which is a complete defense)
In the offshore scenario, the debtor would tell the court that he/she has no legal authority to order the money in the offshore trust back to the U.S.
With a properly setup offshore trust, the client, even if he/she was a co-trustee by the language of the trust, as soon as a creditor tried to get at the assets in the offshore trust, would be removed as a co-trustee and, therefore, would lack the legal authority to transfer anything out of the trust. It is impossible for the client to comply with the U.S. Court’s order to bring back the money from the offshore trust; and, therefore, the client has a good argument for why he/she should not be held in contempt for not abiding by the court’s order to bring back the money to the U.S.
There are problems with impossibility of performance defense. By setting up the trust for the specific purpose of avoiding the long arm of the U.S. court system, the court can determine that the trust was set up in bad faith (to avoid legally being able to bring back money from an offshore trust to the U.S), that you intentionally created the impossibility of performance defense and strike that as a viable defense. Then you have facts that are similar to the Anderson case (click here for a summary) where the court did send the Andersons to jail even though technically the Andersons did not have the legal authority to bring back assets from the offshore trust they set up.
When a court determines if a debtor self-created the impossibility defense, the court looks to see 1) if the debtor acted in good faith; 2) whether the party cooperated with the court by complying to the extent possible; 3) whether the debtor created the impossibility scenario at the time the debtor anticipated the issuance of an order by the court; and 4) how much time had elapsed from the creation of the offshore trust (and trust document) and the time of the contempt proceedings.
Real world planning
There are several real world reasons for setting up OAPTs. What we want you to take from this material is that if your OAPT is setup in a timely manner (before litigation arises) and setup in a technically sound manner, you should not worry too much about being held in contempt.