Offshore Trusts

9th Circuit Ruling Prompts Local Discussion of 'Asset Protection' Trusts
By William C. Smith

In 1998 the Federal Trade Commission sued telemarketers Michael and Denyse Anderson for fraud, alleging that the couple bilked thousands of U.S. investors in a bogus telemarketing scheme. A federal district court froze the Andersons' U.S. assets and ordered them to retrieve funds in an "asset protection trust" (APT) in the balmy Polynesian republic of the Cook islands, located almost 3,000 miles south of Hawaii. After the couple claimed that they could not comply with the asset repatriation order, the judge jailed them for six months on civil contempt charges.

A recent 9th Circuit decision upholding the contempt citation and blasting so-called “asset protection trusts” has provoked a nationwide debate over the future of these offshore trusts. Reverberations from this ruling are also rippling across the oceans to the Cook Islands, the Bahamas, the Caymans, Bermuda and the other debtor-friendly island nations where most APTs are established.

Jay Adkisson, an asset-protection attorney in Irvine, CA comments that the threat of contempt and civil and criminal liability after Anderson has "eliminated offshore trusts as (a) regular asset-protection tool."

Adkisson said that lawyers who help set up APTs risk "professional suicide" by exposing themselves to civil liability to creditors, malpractice claims by clients, criminal obstruction of justice charges, and disciplinary proceedings.

Local tax and estate planning lawyers, like Stephen R. Leimberg of Bryn Mawr, are more measured in their reaction. Leimberg said the views Anderson as a "warning bell" for those who consider offshore trusts as a "game" to defeat creditors.

However, APTs are still an appropriate asset-protection for some wealthy clients who are counseled by lawyers who "know what they're doing," he said.

Talking Pet Tags

In April 1998, The Federal Trade Commission sued the Andersons and others in Las Vegas federal court, alleging that the San Diego couple was marketing a bogus telemarketing enterprise.

The alleged scam involved the sale of $5,000 blocks of late-night TV commercials for treasures like treasures like talking pet tags and water-filled barbells. Investors were allegedly told to expect amazing short-term profits from products sold during these ads.

Actually, the FTC claims, the defendants were the only ones guaranteed to strike it rich. The Andersons allegedly skimmed 45 percent commissions from each investor, while the entire operation was kept afloat by using later investments to pay earlier investors.

The court granted the government’s motion to freeze the Anderson’s assets and ordered them to retrieve funds from their Cook Islands trust account.

Refuge in Island Laws

The Andersons’ choice of this Polynesian country for their banking needs is not as bizarre as it may at first seem.

The Cook Islands’ 1989 trust statute was co-authored by Barry Engel, an asset protection lawyer from Englewood, CO.

Not surprisingly, the law has helped make this idyllic string of 15 coral islands especially attractive to wealthy Americans – even those who never walk its beaches.

To begin with, this former New Zealand territory does not recognize civil judgments from the other nations on the planet. Thus, if foreign creditors want to attach trust assets, they must relitigate their underlying claim under Cook Island law.

This law – which is not widely taught in American law schools – erects several obstacles between a creditor and a debtor’s money. For example, fraudulent conveyance claims have a one-year statute of limitations, transfers by solvent parties are presumptively non-fraudulent, and actual fraudulent intent must be proven “beyond a reasonable doubt” – “the standard of proof that could not be met in the O.J. Simpson case,” as Engel observed in a 1996 article.

The asset protection bar is not as shy about promoting the benefits of protective offshore laws. "Even if a creditor is not dissuaded by the many hurdles and barriers erected by a properly designed and implemented APT, the determined suitor will be confronted with a very tall and wide brick wall on the other side of the last obstacle,” Engel has written. “The bricks in the wall are the properly selected jurisdiction’s protective statutes relating to trusts and the narrow circumstances under which a trust…can be invaded in satisfaction of the separate indebtedness of the settlor.”

The FTC and the courts have so far run into a brick wall in their efforts to bring the Andersons’ money back from its South Pacific sojourn.

The couple told the judge that they could not comply with the asset repatriation because their Cook Island co-trustee had invoked the trust’s anti-duress provision. This clause provided that the Andersons would be cut off from the trust, and title would “automatically vest” in AsiaCiti if any “order, decree or judgment” threatened the fund.

The district court didn’t buy it, imprisoned the couple for contempt after finding that there was “no doubt” that they retained the power to reach their own funds. The 9th Circuit affirmed.

A Thinly Veiled Warning

In a blistering opinion by Circuit Judge Charles E. Wiggins, the court found that the Andersons’ predicament was “the intended result of their own conduct” in setting up an APT.

“While it is possible that a rational person would send millions of dollars overseas and retain absolutely no control over the assets, we share the district court’s skepticism,” said Wiggins.

As “protector” of their APT, the Andersons in fact exercised broad control over the trust – including the power to determine whether an “event of duress” had occurred.

Wiggins concluded with a thinly veiled warning that his court would have little sympathy for APT settlers in contempt cases. Given the jurisdiction-evading nature of these trusts, “there may be little else that a district court judge can do besides exercise his contempt powers to coerce people like the Andersons into removing the obstacles they placed in the way of a court.”

Evidently unmoved by these harsh words by their American judicial colleagues, the Cook Island High Court last month rejected documents signed by the Andersons as a condition of their release from jail.

According to Bret Gibson, the island barrister representing the trust, the court refused to give effect to trust instruments appointing an FTC-controlled trustee and protector.

The ruling from Raratonga shows the local courts will “preserve the assets of the trust” unless it is invalidated under local law, said Gibson.

“This bodes well for the future of Cook Island trusts.”

Consider the Alternatives

Leimberg is less sanguine. Anderson involved "clearly egregious facts," but the case should be a “red flag for those who think (APTs) are a ‘wink’ transaction” to escape creditors.

To avoid fraudulent conveyance problems, APTs must be set up before any actual or looming lawsuits, Leimberg said. Also, the Andersons predicament shows that settlers cannot play games about their degree of control of the trust.

“You shouldn’t be a co-trustee, and you can’t retain powers and say you don’t have powers,” Leimberg said.

“You’ve got to know what you’re doing. Few lawyers and accountants fully understand offshore trusts and the tax complexities that surround them, so the costs of sound advice is high, and there is a great potential for poor advice, which can turn out to be more expensive than good advice.”

According to Leimberg, offshore trusts are not for everyone. “Offshore trusts are only appropriate for very few people,” said Leimberg, a co-author of The New Book of Trusts, published in 1007. Those include the “upper affluent” with $10 million-plus in assets, especially if they’re in professions at “high risk” for litigation, such as real estate developers and doctors.

Even then, Leimberg said that APTs should be considered only after exhausting “lower level creditor protection devices” such as liability insurance, qualified retirement plans, life insurance and annuities, homestead exemptions, and business transfer restrictions.

Mixed Views

Other local lawyers expressed mixed views on offshore trusts. John Ellis of Jenkintown’s Plotnick & Ellis said the trusts are a “complicated structure,” best handled by lawyers who concentrate in the field.

Also, APTs should not be created on a whim, he warned, since they are expensive to set up and typically involve “several thousand dollars” in annual maintenance costs. However, the trusts are useful in protecting against “frivolous lawsuits,” Ellis said.

Edward Butz of the Allentown office of Blank Rome Comisky & McCauley noted that foreign APTs and similar self-settled trusts under Alaska and Delaware law, are exceptions to the “longstanding rule that you can’t create a trust to benefit yourself and have it protected from creditors.”

The “high end” planning involved in setting up APTs, a paucity of case law, and still-evolving IRS policy on these trusts make many lawyers wary of plunging into the area, Butz said.

However, he said he sees no “fundamental problems" with APTs, provided they are established with “no intent to defraud anyone.”

George Bochetto, who represents both creditors and debtors in his Center City practice, has not dealt personally with these trusts. However, Bochetto believes that many courts would share the 9th Circuit’s skepticism that debtors could not reach funds in APTs.

To prevail in a contempt motion, Bochetto notes, the debtor would have to present “pretty incredible evidence that you can’t access your trust. Most of the time, those facts won’t exist, because that would mean you’re giving away your own money.”

The Anderson case is Federal Trade Commission v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999).

This article is reprinted from the September 22, 1999 Legal Intelligencer.