Do Foreign Asset Protection Trusts Work After All?

by Randall K. Edwards

A few weeks ago, a client came to me with a question about what the best tool for her asset protection needs would be.  She had done a lot of research on the Internet, talked to a lot of planners and other professionals, and had a lot more questions than answers.  She finally narrowed her options down to a couple – either a Domestic (U.S.-based) Trust or a Foreign Asset Protection Trust (FATP).  She’d read about both and liked the idea of “going offshore.”  Her biggest concern, though, was that she had been made aware of some case law in which FAPTs had led to ruin – while the trust had survived, the grantors of the trust had been held in contempt of court and even sent to jail for not repatriating the assets from the foreign trust situs.  In those cases, the judge had simply disbelieved that the grantor had no control over the trustee. My client wanted to know if there was any case law upholding a FAPT in which the grantor didn’t end up doing prison time after a creditor assault in which a contempt citation was sought.

             As of May 27, 2008, the answer to that question is a resounding “yes.”  In the case of United States v. Grant, 2008 U.S. Dist. LEXIS 51332, a federal case from Miami, Florida, the judge held that the grantor of a foreign trust cannot be held in contempt of court for failing to comply with a repatriation order if the grantor can establish to the court’s satisfaction that she is simply unable to repatriate the funds to the United States.

             In the Grant case, Raymond Grant (now deceased) had established two FAPTs in Bermuda and Jersey for him and his wife, Arline, in the early 1980’s, with total assets of about $2 million.  When the trusts were established, the Grants stated that they had no known creditors and no knowledge of any claims against them, including any tax liabilities.  In 1991, the IRS assessed a tax deficiency against the Grants, and ultimately got a judgment against them in 2003 for about $36 million.  In 2005, the IRS moved the Southern Florida U. S. District Court for an order repatriating the assets of the FAPTs, arguing that because the trust documents gave Arline Grant the ability to discharge and replace the trustee of the FAPT in “any jurisdiction throughout the world,” she had the power to repatriate the assets by appointing a U.S. trustee who could bring the funds into the U.S.  The court ordered Arline to do so, under penalty of contempt of court.

             In its May 27, 2008 order, the federal judge who had ordered Arline to repatriate the assets had to finally admit that she couldn’t do so because both the Jersey and Bermuda trustees refused to relinquish the funds (based on legal opinions from the trustees’ lawyers that to do so would be a breach of their fiduciary duties to the other beneficiaries of the trusts, the Grants’ children).  Additionally, the court found that no U.S. trust company was willing to act as transferee trustee, in large part because of the possibility of a legal fight with the offshore trustees over repatriation of the funds.  Rather than find Arline in contempt of court, the federal judge found that she had done everything she reasonably could do to comply with the court’s order and that the manner by which the trust had been drafted and carried out precluded her from getting the funds back to the United States.  Citing the U.S. Supreme Court case of United States v. Rylander, 460 U.S. 752 (1983), the court concluded that there was no reason to proceed with the contempt action because compliance with the court’s order was impossible.

             The Grant case doesn’t stand for the proposition that every FAPT will be upheld in U.S. courts.  To the contrary, there is quite a body of law that holds that where the grantor has created the “impossibility” of the trustee complying with a court order, the court may go ahead and jail the recalcitrant grantor who doesn’t repatriate the funds.  What the Grant case does stand for is the proposition that if a FAPT has been carefully crafted and well-defended, it could well withstand an aggressive creditor challenge, even if that creditor is the IRS.

             For now, Arline’s trust is intact, the trust beneficiaries are protected and, best of all, Arline no longer has the threat of a civil contempt of court citation hanging over her head.  She is a free woman.  Chalk one up for the FAPT.

             Of course, FAPTs are not the end-all, be-all, one-size-fits-all asset protection tool for all occasions.  Each person’s situation will dictate which particular tool is best for their unique circumstances.  Nonetheless, the Grant case has affirmed that the FAPT is one tool that should be carefully considered in formulating one’s asset protection  plan.

 Randall K. Edwards, former chief deputy City Attorney in Reno, Nevada, practices law in Utah, Nevada, Arizona and California from his office in Salt Lake City, Utah.