To borrow a line from Mark Twain, recent pronouncements about the death of offshore asset protection (e.g. UBS, theft of Liechtenstein bank data) are highly exaggerated. As the following U.S. federal court decision (1) proves, offshore asset protection, when planned by professionals, is alive and well and very effective.
In the 1970’s and early 1980’s, businessman Raymond Grant utilized domestic limited partnerships to take advantage of certain tax credits and deductions which at that time were valid and legal. Then, in 1983 and 1984, Raymond Grant established two irrevocable offshore trusts, one in Bermuda and one in Jersey, both funded with approximately $2.1 million.
In the late 1980’s, the tax law changed, the IRS disallowed the previous tax credits and deductions and in the early 1990’s assessed millions of dollars in back taxes and penalties against Mr. and Mrs. Grant. The Grants challenged the tax assessments and lost. In 1994 they entered into an installment agreement with the IRS whereby the IRS agreed to accept $3,000 per month. The Grants adhered to the installment agreement and paid regularly. In 1999, the IRS agent in charge died and a new IRS agent took over the Grants’ file. The new IRS agent did not like the deal and unilaterally terminated the installment agreement that had been in place for five years, even though the Grants were current on their obligation and had been paying timely and properly.
The IRS Sues
In 2000, the government filed a federal action against the Grants in the Southern District of Florida, charging them with failure to pay federal income taxes, plus interest and penalties. Initially the Grants defaulted, but when the IRS went after the assets in the foreign trusts, the Grants appeared in court. In 2003, the IRS won a judgment against the Grants for over $36 million. In the interim Mr. Grant died. The IRS levied on Mrs. Grant’s Social Security benefits and tax refunds, but found no other U.S. assets.
The Repatriation Order
In 2005, the IRS targeted the offshore trust assets and sought a repatriation order from the federal court. U.S. Magistrate Klein found that Arline Grant held the power to fire and replace trustees, and the power to effect distributions from the trusts to herself. Therefore, Magistrate Klein issued a repatriation order, requiring Arline to either repatriate the assets or fire the foreign trustees and appoint a U.S. resident trustee to administer the trusts, thus bringing the trust assets within U.S. jurisdiction, and available to creditors.
Arline Grant complied with the repatriation order and wrote to both trustees, requesting distribution of the trust assets to her and advising that she was dismissing the foreign trustees and appointing a U.S. resident trustee to administer the trusts.
The trustees rejected Arline’s instructions, claiming that their relinquishment of the trust assets to her would be a breach of the trustees’ obligation to future trust beneficiaries (i.e. the Grants’ children), and that her removal of the current trustees would not be a valid exercise of her powers under the trusts. The trust assets thus remained offshore out of U.S. jurisdiction.
By 2008 the trust assets still had not been repatriated. The IRS urged the Court to hold Arline Grant in contempt for failing comply with the 2005 repatriation order. U.S. District Judge Jordan refused to hold Mrs. Grant in contempt for the trustees’ refusal to repatriate the trust assets, stating that “…this failure is not for lack of effort [by Mrs. Grant]”. Judge Jordan held that because Arline had repeatedly written to the trustees requesting distributions and dismissing the trustees, she had sufficiently established that she was not able to repatriate the assets. The Court stated that when compliance with a court order is impossible, the court cannot hold the respondent in contempt. Arline Grant is free and the trust assets are intact.
Result After Grant
In theory, Magistrate Klein’s order to repatriate should have had a more favorable result for the IRS. After all, according to the trust deeds, Arline did have the power to fire the trustees, and the power to order distributions. The fact that the trustees refused to make distributions and did not allow themselves to be fired was counter to the terms of the trust deeds. But the case centered on contempt. The court did not (and, indeed, could not) concern itself with whether the trustees’ responses were valid. The issue at hand was whether Arline complied with the court’s order to repatriate; she did – – she wrote to the trustees requesting a distribution and dismissing them.
The ultimate issue in this case (as in all other offshore trust contempt cases) was whether the defendant had actual control over the offshore trust assets. Although the trust deeds did, in fact, give Arline power over the trusts – – the power to remove trustees, and the power to require distribution of assets – – those powers proved to be ineffective when the trustees refused to follow Arline’s instructions.
Thus, it was, in fact, impossible for Arline to repatriate the funds, notwithstanding her attempts to remove the trustees and order that the funds be brought back to the U.S. Arline had a paper power over the trusts and their assets, but not an actual power, and the gap between the two rendered it impossible, as a practical matter, to comply with the Court’s order to repatriate. Because of that impossibility, Arline was not in contempt of the repatriation order. The Grant case is a clear pro-debtor decision holding that a contempt order will not be issued where compliance with a repatriation order is impossible.
The lesson for offshore asset protection planners is to prevent a situation where the US client may be found to control the trust. The Grant trusts should never have bestowed powers on Arlene. This would have avoided the Magistrate’s repatriation order in the first place. In the Grant case, the Magistrate correctly held that Arline had power over the trust assets. It was only because of the trustees’ violation of the terms of the trusts that Arlene avoided contempt. A good offshore practitioner should never allow the client to be put in this position. Proper offshore asset protection planning requires the U.S. client to part with all legal control over trust assets. In other words, render repatriation impossible because of lack of legal power, not because of a trustee’s refusal to follow proper instructions. Although the client must part with legal control, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees who will, at all times, be sympathetic to the client’s real interests.
In the end, Arlene Grant is free, with her money safe in the offshore trusts. The result after Grant confirms what we have long counseled — that offshore asset protection, when done properly and lawfully, is completely legal and 100% effective.
UPDATE: Please see our 2013 Article here