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Tag: Offshore Trust

Best Asset Protection Trust isnt an Asset Protection Trust

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Could it be true that the best trust for asset protection isn’t even an asset protection trust? It may sound strange, but the legal precedent proves it to be true.

Whenever you hear the term “asset protection trust” it almost exclusively refers to a self-settled spendthrift trust. This where the settlor establishes and funds an irrevocable trust naming themself as a beneficiary. The trustee is an independent party who can make distributions from the trust to the settlor. So what does this mean? It means that the settlor can give money or assets to the independent trustee of an “asset protection trust” so future creditors can’t touch those assets. It also promises that the trustee can give the assets back to you at any time. This sounds pretty awesome right!

The problem is that self-settled trusts have historically provided zero asset protection in the United States. Generations of US laws have made it clear that your creditors can reach into a trust that you create if you are also the beneficiary.

This includes dozens of US court cases successfully attacking the assets of offshore asset protection trusts and none to the contrary.

Likewise, domestic self-settled asset protection trusts have failed in the only court cases to date.

So if quote Asset Protection Trusts have a dismal record in protecting assets, what is the solution?

The solution lies right in front of us. Generations of US legal precedent has made it perfectly clear that a non self-settled trust has ALWAYS worked. As opposed to creating a trust and naming yourself as the beneficiary, this trust names a third part as the beneficiary, such as the settlor’s spouse or children. Because the trust is not “self-settled” the creditors of the settlor cannot reach into the trust, so long as there are no fraudulent transfers into it.

We’ve also learned that a special power of appointment is a tool that provides infinite flexibility without subjecting a trust to creditors. Court cases and statutes going back over 200 years have consistently held that a special power of appointment is not subject to creditors, without exception.

We call this a 541 Trust because it is canonized in Section 541(b)(1) of the US Bankruptcy Code, as well as multiple other statutes and court cases nationwide dating back generations. The 541 Trust is superior to what are traditionally called Asset Protection Trusts because:

1. It works in all 50 states and in bankruptcy courts and has for over 200 years.
2. It works for any asset in any location.
3. It is proven by court cases for generations. We can actually show you court cases and other examples where our trusts were upheld.
4. It’s simple to understand, implement, and operate unlike the extremely complex structures associated with offshore trusts
5. It is infinitely flexible and can be modified at any time.
6. It is a fraction of the cost of an offshore trust structure and doesn’t have high annual maintenance charges or complex IRS reporting.

Nobody prepares this trust as well as we do. We pioneered it, we perfected it, and we have seen it succeed in every challenge. Some have criticized the 541 Trust but the legal precedent and the continued court support remains. It doesn’t matter what we say or what others say. The only thing that matters is what the courts say. The courts have spoken in favor of the 541 Trust over and over again.

So technically speaking, a 541 Trust isn’t an asset protection trust. It just happens to protect assets better than the types of trusts referred to as asset protection trusts.

CALL 801-765-0279 for more information

SEC v Greenberg – Offshore Trust Contempt

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
KEITH GREENBERG, Defendant.

(SEC v Greenberg)

Case No. 00-09109-CV-HURLEY/HOPKINS.
United States District Court, S.D. Florida.
May 21, 2015.

ORDER ADOPTING THE REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE, AND HOLDING DEFENDANT KEITH GREENBERGIN CONTEMPT

DANIEL T.K. HURLEY, District Judge.

THIS CAUSE comes before the Court upon the Report and Recommendation [ECF No. 67] of Magistrate Judge James M. Hopkins on Plaintiff Securities and Exchange Commission’s Application for an Order to Show Cause Why Defendant KeithGreenberg Should Not Be Held In Contempt of Court [ECF No. 27].

BACKGROUND

A. FINAL JUDGMENT

In 2002, the Court entered Final Judgment of $5,915,346 against Defendant KeithGreenberg.[1] Through default, Greenberg admitted to violating the Securities Act and the Securities Exchange Act, as well as regulations promulgated thereunder.[2]The Final Judgment is comprised of a civil penalty of $100,000, disgorgement of $3,828,000, and prejudgment interest of $1,987,346.[3]

By 2010, Greenberg had paid nothing.[4] In late 2010, the SEC learned thatGreenberg lived an “extravagant lifestyle.”[5] On August 11, 2011, Defendant paid $114,592.35 to the SEC,[6] following the sale of a condominium. The SEC applied the payment to Greenberg’s civil penalty.[7] Greenberg paid nothing further.

By September 13, 2013, Greenberg owed the SEC $6,883,580.48.[8] Interest accrued at $288 a day.[9] On November 26, 2013, the SEC moved the Court for an Order to Show Cause Why Defendant Keith Greenberg Not Be Held in Contempt of Court.[10] In March 2014, Greenberg began paying $2,500 to $3,750 a month.[11]

The Court granted the SEC’s Motion to Show Cause on November 26, 2013, and referred the Motion to Magistrate Judge James M. Hopkins for an evidentiary hearing.[12] The Magistrate held three such hearings on October 15, 2014, October 16, 2014, and November 3, 2014, at which he admitted into evidence both testimony and exhibits.[13] This is what he found:

B. FINDINGS OF FACT

Mrs. Elise Greenberg created the Elise Trust in 1996.[14] From 1996 to 2011, KeithGreenberg’s efforts grew the Elise Trust from $1 million to $6-7 million in assets.[15]

The Elise Trust owns a condominium in Miami, Florida.[16] The Greenbergs lease this condominium from the Elise Trust.[17]

The Raintree Development Irrevocable Trust owns a house in Goldens Bridge, New York.[18] The Greenbergs lease this house from the Raintree Trust.[19]

At both their condominium in Miami and their house in New York, the Greenbergs have access to two luxury vehicles and a golf membership, all paid for by the Trusts.[20]

Braintree Properties, LLC is a New York company.[21] Braintree makes money by investing in medical centers.[22] From June 2006 to September 2011, Braintree paid $2,151,753 of the Greenbergs’ personal expenses.[23]

Greenberg was a consultant for the consulting firm, J.D. Keith, LLC.[24] J.D. Keith had a contract with a medical firm paying $10,000 a month for 22 months.[25]Between 2004 and 2006, the medical firm also personally paid Greenberg $83,000.[26]

In 2006, Braintree sold some of its medical centers to the medical firm.[27] Because of accounting issues, a dispute arose, and Braintree and the medical firm entered into a settlement agreement.[28] Under the agreement, the medical firm agreed to payGreenberg $600,000 personally over five years, provide him a $38,400 automobile expense, and reimburse him for entertainment and travel expenses.[29] These payments were made payable to the firm J.D. Keith in the amount of $635,538.[30]Greenberg used this money from J.D. Keith to pay his personal expenses.[31]

Vantage Beach Holdings, LLC was formed in 2010.[32] The Elise Trust owns and funds Vantage Beach.[33] Vantage Beach has recently replaced Braintree in paying the Greenbergs’ personal expenses.[34]

Together, the Raintree Trust, Braintree, J.D. Keith, and Vantage Beach are known as “the Entities.”

Before the Court entered Final Judgment in 2002, the Greenbergs owed more than $2,000,000 to the IRS.[35] By 2005, that amount totaled $7,750,000.[36] From 2006 to 2008, the Greenbergs made partial payments to the IRS by withdrawing funds from the Entities.[37] The IRS has written off $5 million and as of October 2014, the Greenbergs owed the IRS $675,000.[38]

DISCUSSION

A. CONTEMPT STANDARD

A court may enforce a final judgment of disgorgement, including prejudgment interest and civil penalties, through its contempt power.[39] To hold a defendant in contempt, the plaintiff must prove by “clear and convincing” evidence that the defendant violated the final judgment.[40] This requires proving that “(1) the allegedly violated order was valid and lawful; (2) the order was clear and unambiguous; and (3) the alleged violator had the ability to comply with the order.”[41]

If the plaintiff proves its prima facie case, the defendant may assert his “present inability to comply” as a defense.[42] To assert this defense, the defendant must prove “that he has made `in good faith all reasonable efforts'” to comply with the final judgment.[43] If he does so, the burden shifts to the plaintiff to prove the defendant’s “ability to comply.”[44]

B. REPORT AND RECOMMENDATION

The Magistrate concluded that Greenberg had the ability to comply with the Final Judgment, but that he did not. Accordingly, the Magistrate recommends thatGreenberg be held in contempt. He also recommends that:

Defendant shall be incarcerated until such time as he satisfies the Judgment to the greatest extent he is able, or provides evidence that he has taken all reasonable efforts to comply with the Judgment yet is unable to make any payment.[45]

The Court must review the Report and Recommendation’s legal conclusions, as well as those objected to portions, de novo.[46] It must be satisfied that there is “no clear error on the face of the record.”[47] Upon this review, the Court will overruleGreenberg’s objections, sustain the SEC’s, and adopt the Report and Recommendation.

OBJECTIONS

A. OBJECTION 1: “HAD THE ABILITY TO PAY”

Greenberg objects to the Report & Recommendation, arguing that the Magistrate considered Greenberg’s past, not present, ability to comply with the Final Judgment. According to Greenberg, the Court must look only to his present ability to comply. Defendant objects as follows:

The Magistrate Judge committed legal error by misapplying the legal standard for civil contempt holding: “In this case, the only issue in dispute is whether Defendant had, at some point since the Judgment was entered in 2002, the ability to pay some or all of that Judgment.” Having misstated the criteria, the Magistrate Judge erroneously concluded that the SEC had met its burden “. . . to show, clearly and convincingly, that Defendant had the ability to pay.”[48]

Greenberg is partly correct as what issues are in dispute, but the Magistrate Judge did not err. The SEC’s burden is to prove that Greenberg “had the ability to comply” with the Final Judgment. The burden then shifts to Greenberg to prove his “present inability to comply.” According to Greenberg, “the Magistrate Judge points to no proof, much less clear and convincing proof, of Mr. Greenberg’s present ability to comply.”[49] Such proof, however, is not the SEC’s burden. The burden is onGreenberg to prove his present inability to comply—only then does the burden shift to the SEC to prove a present ability. The Eleventh Circuit states the requirements follows:

A party seeking civil contempt bears the initial burden of proving by clear and convincing evidence that the alleged contemnor has violated an outstanding court order. Once a prima facie showing of a violation has been made, the burden of production shifts to the alleged contemnor, who may defend his failure on the grounds that he was unable to comply. The burden shifts back to the initiating party only upon a sufficient showing by the alleged contemnor. The party seeking to show contempt, then, has the burden of proving ability to comply.[50]

Because the SEC proved Defendant had the ability to comply, the SEC satisfied its burden. The Magistrate did not apply the wrong legal standard, and appropriately concluded that the SEC had proved its prima facie case for contempt. Greenberg’sfirst objection is overruled.

B. OBJECTION 2: “PRESENT ABILITY TO COMPLY”

Next, Greenberg objects to the Report and Recommendation, arguing that the recommended incarceration is unconstitutionally punitive. If Greenberg cannot comply with the Final Judgment, then incarceration would be criminal, not civil, contempt. Greenberg would have `no keys to his prison.’[51] The question, then, is whether Greenberg proved his “present inability to comply.” “Present” means from the time of the contempt hearing to the time of the contempt citation.[52] The Magistrate reviewed Greenberg’s arguments on this question, and, based on his findings, concluded each was wanting.

First, the Magistrate found that Greenberg used the Entities to pay his personal expenses. Had he wished, the Magistrate concluded, Greenberg could also use the Entities to pay his Final Judgment.[53] Second, the Magistrate concluded thatGreenberg should have asked the Elise Trust whether it would sell one of its cars, or rent one of its homes, to allow Greenberg to pay his Final Judgment. The Magistrate found “it to be beyond belief” that the Elise Trust would not, if it were asked, “agree to a compromise” to avoid Greenberg’s contempt.[54] Third, the Magistrate found that Greenberg withdrew money from the Entities to pay the IRS. Defendant, the Magistrate concluded, could do same for the SEC.[55] Finally, the Magistrate concluded that Greenberg’s monthly payments, compared to the findings of his “lavish lifestyle,” were insufficient to show his good faith to comply with the Final Judgment.[56] Upon de novo review, the Court not only agrees with the Magistrate’s conclusions, but finds additional support for them in the record. The record shows that although Greenberg has no “assets,” not even a personal bank account,[57] the Entities have become his piggy bank.

For example, Braintree purchased a Miami condominium for Greenberg in his own name.[58] Braintree paid to renovate the condominium, Braintree made its mortgage payments, and Braintree paid the condominium fees.[59] Vantage Beach, the Entity which replaced Braintree in paying Greenberg’s personal expenses, listsGreenberg as the sole checking account signatory.[60] From 2011 to 2012, Vantage Beach paid to renovate the Greenbergs’ condominium.[61] Furthermore, the Raintree Trust, which owns the Greenbergs’ New York home, has no accounting records and has not filed any tax returns since 2010.[62] As Greenberg testifies: the Raintree Trust “is clearly a, you know, among other things an asset protection, you know, vehicle.”[63]

For these, and the reasons cited in the Report, the Magistrate correctly concluded that Greenberg could use some, or all, of the Entities to pay or make reasonable efforts to comply with his Final Judgment. Such efforts could include selling or renting the New York home, selling or renting the Miami condominium, terminating the lease on the luxury cars, terminating the golf memberships, and withdrawing funds from the Entities.

C. “100% OWNED BY THE ELISE TRUST”

The SEC makes one objection to the Report and Recommendation. It objects to the finding that Braintree is “100% owned by the Elise Trust.” Because ownership of Braintree is immaterial to the Court’s present order, it will sustain the SEC’s objection and leave this question unresolved.[64]

CONCLUSION

Accordingly, it is hereby

ORDERED and ADJUDGED that:

1. The Report and Recommendation of Magistrate Judge James M. Hopkins [ECF No. 67] is ADOPTED in its entirety and incorporated herein by reference.

2. Plaintiff Securities and Exchange Commission’s Objections to Magistrate’s Report and Recommendation [ECF No. 68] are SUSTAINED.

3. Defendant Keith Greenberg’s Objections to the Magistrate’s Report [ECF No. 69] are OVERRULED.

4. Defendant Keith Greenberg is in CONTEMPT OF THIS COURT. It is hereby further ORDERED that:

a. Keith Greenberg shall surrender to the custody of the U.S. Marshal’s Office for the Southern District of Florida, located at the Paul G. Rogers Federal Building and U.S. Courthouse, 701 Clematis St., West Palm Beach, Florida, 33401, by 12:00 p.m. on Monday, June 1, 2015.

b. The U.S. Marshals Service SHALL REQUEST designation from the Bureau of Prisons for the nearest appropriate federal facility to West Palm Beach, Florida, for Defendant Keith Greenberg’s further incarceration.

c. The U.S. Marshals Office for the Southern District of Florida SHALL NOTIFY the Court of the fact of Keith Greenberg’s appearance or non-appearance on June 1, 2015.

d. Defendant Keith Greenberg SHALL REMAIN incarcerated until such time that he has complied with the conditions set forth in the 2002 Final Judgment, or provides evidence that he has made in good faith all reasonable efforts to do so.

[1] Final J. on Disgorgement and Civil Penalties (Oct. 4, 2002) [ECF No. 26].

[2] Final J. of Permanent Inj. by Default Against Defs.’ Keith Greenberg and Coyote Consulting and Fin. Servs. (Apr. 4, 2002) [ECF No. 18].

[3] Final J. on Disgorgement and Civil Penalties [ECF No. 26].

[4] Mot. for Order to Show Cause at 2 [ECF No. 27].

[5] Id.

[6] Keith Greenberg Account, Motion for Order to Show Cause, Silberman Aff., Ex. D, [ECF No. 27-3].

[7] Id.

[8] Id.

[9] Id.

[10] [ECF No. 27].

[11] Id. at 2; see supra note 64

[12] [ECF No. 29].

[13] See [ECF Nos. 54, 57, 61].

[14] Report and Recommendation at 3 [ECF No. 67] [hereinafter R&R].

[15] R&R at 11; see note

[16] R&R at 5.

[17] Id.

[18] Id.

[19] Id.

[20] Id. at 4-5.

[21] Id. at 5.

[22] Id.

[23] Id.

[24] Id. at 6.

[25] Id. at 6-7.

[26] Id. at 6.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id. at 7.

[32] Id.

[33] Id.; Nov. 3, 2014 Hr’g 40:1-4.

[34] R&R at 7.

[35] Id. at 2; Def.’s Pre-Hr’g Br. at 4.

[36] R&R at 2; Def.’s Pre-Hr’g Br. at 4.

[37] R&R at 2; Def.’s Pre-Hr’g Br. at 4.

[38] R&R at 2.

[39] S.E.C. v. Solow, 682 F. Supp. 2d 1312, 1329-30 (S.D. Fla.) (Middlebrooks, J.), aff’d, 396 Fed. App’x 635 (11th Cir. 2010).

[40] Newman v. Graddick, 740 F.2d 1513, 1525 (11th Cir. 1984).

[41] Georgia Power Co. v. N.L.R.B., 484 F.3d 1288, 1291 (11th Cir. 2007)

[42] E.g., CFTC v. Wellington Precious Metals, Inc., 950 F.2d 1525 (11th Cir. 1992).

[43] Id.

[44] Id.

[45] R&R at 16.

[46] Fed. R. Civ. P. 72(b)(3); 28 U.S.C. § 636(b)(1)(C); LeCroy v. McNeil, 397 Fed. App’x 664 (11th Cir. 2010).

[47] Fed. R. Civ. P. 72 advisory committee’s notes (1983); Macort v. Prem, Inc., 208 Fed. App’x 781, 784 (11th Cir. 2006).

[48] Greenberg Objection at 8 (quoting R & R at 8-9).

[49] Id. at 10.

[50] CFTC v. Wellington Precious Metals, Inc., 950 F.2d 1525, 1529 (11th Cir. 1992) (citations omitted).

[51] There are two types of coercive contempt. With civil contempt, “the contemnor is able to purge the contempt and obtain his release by committing an affirmative act.” Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 844, (1994) (internal quotation omitted). Civil contempt coerces compliance: the contemnor “carries the keys of his prison in his own pocket.” Id.(citation omitted) (internal quotation marks omitted). With criminal contempt, “the contemnor cannot avoid or abbreviate the confinement through later compliance.” Criminal contempt is punitive: “the defendant is furnished no key.” Id. at 830 (internal quotation marks omitted) (citation omitted).

[52] The Eleventh Circuit’s “present” standard derives from the Second Circuit, which held that a defendant could not be held in contempt because “at the time of the contempt citations . . . he did not have the present ability to comply with the court’s order.” United States v. Wendy, 575 F.2d 1025, 1031 (2d Cir. 1978), cited in United States v. Koblitz, 803 F.2d 1523, 1527 (11th Cir. 1986), cited inJordan v. Wilson, 851 F.2d 1290, 1292 n.2 (11th Cir. 1988), quoted in McGregor v. Chierico, 206 F.3d 1378, 1382 (11th Cir. 2000), cited in Riccard v. Prudential Ins. Co., 307 F.3d 1277, 1296 (11th Cir. 2002), quoted in F.T.C. v. Leshin, 618 F.3d 1221, 1232 (11th Cir. 2010). And the Supreme Court, when reviewing a defendant’s “present inability to comply with the order in question,” looks to “the showing made by [the defendant] at the [contempt] hearing.” United States v. Rylander, 460 U.S. 752, 757 (1983).

[53] R&R at 11.

[54] R&R at 11.

[55] Id. at 12.

[56] Id. 13.

[57] Nov. 3, 2014 Hr’g 150:5-8 (“Q: Do you have any available assets to satisfy the existing judgment? A: No, only, only the income that I hope to continue to make to try to continue to satisfy the judgment.”); R&R at 3.

[58] Pl.’s Closing Ar., Exhs. 5, 6.

[59] Nov. 3, 2014 Hr’g 70:24-71:2; 72:2-24; Pl.’s Closing Ar., Ex. 56, at Bates No. FR 00001800.

[60] Pl.’s Closing Ar., Ex. 41.

[61] Nov. 3, 2014 Hr’g 40:5-14

[62] Id. 106:10-16.

[63] Id. 108:17-18.

[64] See infra note 11.

 

Transferable Offshore Trust Fails

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Some asset protection promoters tout a transferable offshore trust strategy which begins onshore in the U.S. and shifts offshore at the first sign of duress. Such strategies initially hold assets in a U.S. entity or domestic asset protection trust (DAPT) and then shift or transfer to an offshore jurisdiction when the client is under duress.

An Ohio judge recently froze the assets of a limited partnership that was owned by a Cook Islands Trust.  The asset protection promoter had told the client they could shift the partnership interests offshore at the first sign of duress.  This is the same asset protection strategy and the same failing result as in the Indiana Investors case.  (See Indiana Investors, LLC v. Hammon-Whiting Medical Center, LLC No. 45D02-0807-CT-201 (Lake Superior Court, Lake County, Indiana); Indiana Investors v. Victor Fink, No. 12-CH-02253 (Circuit Court of Cook County, Illinois, Chancery Division), Victor Fink transferred assets to a Cook Islands trust provided by one of the popular asset protection providers found on the internet who claimed that the control could be shifted offshore in the event of duress.  The plaintiffs were able to obtain temporary restraining orders which prevented the trustees and protectors from shifting the control to the offshore  trustee (South Pac Trust International, Inc.) and the bank accounts were all frozen.)

The weakness of this strategy is not only proven by court cases, but it is emphasized by experts in the field of asset protection.  In fact, some are calling the this strategy legal malpractice.

Jay Adkisson had this to say about the asset protection strategy of shifting assets from a domestic entity to an offshore trust (FAPT) when under duress: “It is, quite arguably, malpractice for a planner to leave unencumbered U.S. assets owned by [a] FAPT, directly or indirectly, in the U.S. and within reach of creditors.”

Gideon Rothschild said, ” This seems to be the typical structure employed by many lawyers. They tell the clients they can keep the assets in the US in an FLP that you control and then upon an event such as a lawsuit the trustee is informed that he should take necessary steps to cause the FLP to be liquidated. In fact many of these structures will also have a US co-trustee so they don’t even have to file Form 3520 until US trustee resigns. I’ve told such settlors that this is a recipe for disaster. Not only will it expose the assets to what is happening in this case – the US court’s jurisdiction and attachment orders – but could also put the settlor in jail for contempt since he, as the GP, will have to take the steps needed to move the account offshore at a time when the clouds have already formed. That is why I will only settle foreign trusts where the client has liquid assets that he is willing to place offshore from day one. Otherwise, one needs to use other (domestic) strategies.”

 

Why Self-Settled Asset Protection Trusts Don’t Protect Assets

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Don’t Self-Settle for Inadequate Asset Protection

Why Self-Settled Asset Protection Trusts Don’t Protect Assets

By: Randall Sparks, JD LL.M. and Lee S. McCullough, III, JD MAcc

Click HERE for pdf verison

Self-Settled Asset Protection Trusts are all the rage. They come in two main flavors: (1) The Domestic Asset Protection Trust (“DAPT”) and (2) the Offshore Trust, aka Foreign Asset Protection Trust (“FAPT”). To boost in-state trust business, about a dozen states have passed or are actively improving their self-settled asset protection trust statutes … and that number is growing. Although self-settled trusts are heavily promoted by asset protection attorneys across the county, all of the relevant court cases indicate that if asset protection is your goal, you should find a more viable option.

If self-settled trusts are inadequate for asset protection, why do attorneys go to such lengths to sell them? The answer is simple: Money. Asset protection promoters market them heavily promising maximum protection and make big profits in the process. They do this despite zero court authority in existence that upholds self-settled asset protection trusts. Promoters also ignore the many court cases showing that self-settled trusts simply don’t afford the promised asset protection benefits.

What is a Self-Settled Asset Protection Trust?

There are three parties to any trust agreement: (1) a Settlor, who creates the trust and funds it with assets, (2) a Trustee, who holds legal title to the assets in trust for the beneficiaries, and (3) the Beneficiaries, who are eligible to receive benefits from the trust. In most trusts, the Settlor and Beneficiary are different people. In a self-settled trust, the Settlor is also a Beneficiary. In concept, the idea is incredible: contribute any amount of property to the trust and while creditors can’t touch it, you can enjoy it as much as you want. The reality is that these arrangements just don’t work as advertised.

Public policy has long been clear that you cannot settle a trust for your own benefit and at the same time shield the trust assets from your potential creditors. The Uniform Trust Code states that a creditor of a settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.[1] In other words, if a Settlor/Beneficiary has access to trust cash, property, vehicles, etc., so does a creditor.

Offshore jurisdictions were the first to market self-settled trusts by promising protections in a foreign jurisdiction that is not bound by the laws of the United States. In 1997, Alaska was the first state to enact a DAPT statute. Since then, over a dozen United States jurisdictions have enacted DAPT statutes. However, creditor attorneys have developed successful techniques to pierce these trusts. By frequently siding with creditors in these cases, courts have rebuffed the zeal of offshore and domestic jurisdictions to establish and promote self-settled trusts as superior asset protection tools.

Court Cases Defeating Domestic Asset Protection Trusts (DAPTs)

When it comes to self-settled trusts, there is an elephant in the room and that elephant has a name: Bankruptcy. In states that don’t recognize self-settled trusts, a debtor’s interest in a self-settled trust is subject to bankruptcy.[2] The Mortensen case made clear that Federal Bankruptcy Law can even defeat a self-settled trust in states that recognize, protect, and advocate self-settled trusts.[3] In Mortensen, an Alaska resident created a self-settled trust under Alaska’s DAPT statute under ideal circumstances: he was solvent and there were no judgments against him. Several years later he ended up in a bankruptcy court sitting in Alaska. The court applied Federal Bankruptcy Law instead of Alaska law ruling that the trust assets were reachable by the creditors in the bankruptcy under Section 548(e) of the Federal Bankruptcy Code.[4]

Another problem with a DAPT is a potential lawsuit arising in a state that does not recognize or protect self-settled trusts. In Dexia Credit Local v. Rogan, the Seventh Circuit Court ruled that despite the debtor’s trust having been created in a DAPT state, Illinois law applied instead.[5] Another huge blow to DAPTs came on May 17, 2013 in Waldron v. Huber where, among other things, Washington State law applied rather than Alaska law where the DAPT was formed.[6] The result was that the trust assets were not protected. Based on the Dexia Credit and Huber cases, one shouldn’t expect that a self-settled trust will be upheld in a state that does not allow them. Numerous other cases indicate that a court can apply the law of the state where the court is located and not recognize the laws of the state where an entity was formed.[7]

If self-settled trusts don’t work in bankruptcy and don’t protect against laws of DAPT unfriendly states, then you can just avoid declaring bankruptcy and avoid contacts outside of your DAPT friendly state, right? Not so fast. Unfortunately, even if you are careful not to get sued in the wrong state and manage to avoid voluntary bankruptcy, your creditors could file an involuntary bankruptcy petition against you. The court cases and the bankruptcy code have shown that even though a self-settled trust is created pursuant to a DAPT statute, the trust is still vulnerable.

Court Cases Defeating Offshore Trusts, aka Foreign Asset Protection Trusts (FAPTs)

Many asset protection promoters claim that offshore trusts are impermeable, in contrast to the absence of a single court case to support their claims. Why do they sell a product that has such an abominable record? It’s a calculated risk that the resulting liability of a few failed trusts that are actually challenged will be vastly overshadowed by those that are never tested. In other words, they know that the majority of their clients will never get sued or go bankrupt. For those who are sued or face bankruptcy however, if the trust is self-settled, its assets are not protected.

Although promoters of FAPTs claim foreign laws protect you because the trust is not subject to the jurisdiction of U.S. Courts, there are many court cases showing how offshore trusts fail. For example, it is well established that an offshore trust cannot protect onshore assets.[8] Numerous other cases show that even though a court in the United States may not have jurisdiction over the FAPT, they have jurisdiction over the debtor and can order the debtor to repatriate the trust assets or face incarceration for contempt. In In re Lawrence the debtor was jailed for over six years for refusing to repatriate assets, in Bank of America v. Weese the debtors paid settlement of over $12,000,000 in order to avoid incarceration, and in U.S. v. Plath the debtor was held in contempt for refusing to obey the court order to disclose details about offshore accounts despite the fact that there was no fraudulent transfer.[9] These are just a few lowlights of the long list of failed FAPT strategies.

For a time, offshore trust peddlers used US v. Grant as the one court case that supported their strategy, because it was the single case where a court did not hold the debtor in contempt. The purported steel bulwark of the Grant opinion came crashing down when, in the Spring of 2013, a Florida court ruled against the very strategy FAPT promoters touted, dealing a huge blow to the offshore asset protection industry.[10] In Grant, Raymond Grant created two self-settled trusts offshore (FAPTs), one for his own benefit and one for the benefit of his wife. Raymond funded both FAPTs at a time when he was solvent and had no known claims against him, once again ideal circumstances. Years later, Raymond died and the IRS obtained a $36 million dollar judgment against Raymond’s wife Arline. The U.S. moved to hold Arline in contempt of court for failing to repatriate the assets in the offshore trusts to pay the tax liability. Initially, the court refused to do so because Arline had never exerted control or received benefits from these trusts. But later when it was proven that Arline had received funds from the trust through her children’s accounts, the court issued a permanent injunction prohibiting Arline and her children from ever receiving any benefits from the trusts. Ultimately a very expensive “asset protection” strategy kept the assets protected from creditors, but also out of reach of those the trust was created to benefit. If your goal is to protect assets from both creditors and yourself, an offshore trust may be a great fit. If, however, you seek any self-settled benefits at all, look elsewhere.

Solution – Non-Self-Settled Trust

The alternative to the self-settled trust is simple, remove the one aspect of the trust that creates all of its vulnerability; make the trust non-self-settled. A non-self-settled trust, aka third party trust, has the support of state and federal statutes, the federal bankruptcy code, and an overwhelming number of court cases. Since the Settlor is not a beneficiary, the creditors of the Settlor cannot reach the trust assets, even in bankruptcy.[11] A properly drafted third party trust can still benefit the settlor without disrupting the asset protection. The settlor could potentially benefit from the trust through a spouse who is a beneficiary. For example, the settlor could live in a trust owned residence free from rent so long as the spouse is a beneficiary.[12] The settlor could be an income only beneficiary and still protect the trust principal.[13] The settlor could also maintain flexibility by appointing a trust protector or through the use of a special power of appointment.

If the trust has discretionary spendthrift language, the assets are also shielded from the creditors of the beneficiaries. If Raymond Grant had created a non-self-settled discretionary spendthrift trust for his wife Arline, instead of creating the two FAPTs that failed, the assets would have been protected from the IRS judgment and Arline and other trust beneficiaries could still have benefitted from the trusts. For example, the trust could have purchased a home for Arline to live in and paid Arline’s credit card bills.[14]

If true asset protection is the goal, consumers and especially promoters should remember the old adage that pigs get fat and hogs get slaughtered. The court cases make it clear that a non-self-settled trust provides proven asset protection, whereas a self-settled trust lays out the welcome mat, flips on the light, and leaves the front door wide open to creditors. If you self-settle, you settle for an inferior trust.

[1] Uniform Trust Code Section 505, Restatement (Second) of Trusts Section 156(2), and Restatement (Third) of Trusts Section 58(2).

[2] Federal Bankruptcy Code 11 U.S.C. 541. See also In re Simmonds, 240 B.R. 897 (8th Cir. BAP (Minn.) 1999).

[3] In re Mortensen, Battley v. Mortensen, (Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011).

[4] 11 U.S.C. 548(e).

[5] Dexia Credit Local v. Rogan 624 F. Supp 2d 970 (N.D.Ill. 2009).

[6] Waldron v. Huber (In re Huber), 2013 WL 2154218 (Bk.W.D.Wa., Slip Copy, May 17, 2013).

[7] American Institutional Partners, LLC v. Fairstar Resources, Ltd. (where Utah law applied against a Delaware-formed LLC), 2011 WL 1230074 (D.Del., Mar. 31, 2011), Malone v. Corrections Corp. Of Am., 553 F.3d 540, 543 (7th Cir. 2009) (a district court in diversity applies the choice-of-law rules of the state in which it sits).

[8] In re Brooks, 217 B.R. 98 (D. Conn. Bkrpt. 1998) (where the offshore trust was disregarded because it was self-settled and the onshore assets were seized).

[9] In re Lawrence, 279 F.3d 1294 (11th Cir. 2002), Bank of America v. Weese, 277 B.R. 241 (D.Md. 2002), and U.S. v. Plath, 2003-1 USTC 50,729 (U.S. District Court, So. Dist. Fla. 2003).

[10] US v. Grant, 2013 WL 1729380 (S.D.Fla., April 22, 2013).

[11] Uniform Trust Code Section 505, Restatement (Second) of Trusts Section 156(2) and Restatement (Third) of Trusts Section 58(2), In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002), Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997).

[12] Revenue Ruling 70-155, Estate of Allen D. Gutchess, 46 T.C. 554 (1966), PLR 9735035.

[13] In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002).

[14] United States v. Baldwin, 391 A.2d 844 (1978) or U.S. v. O’Shaughnessy, 517 N.W.2d 574 (1994) (where the trust assets were not subject to tax lien because the trust was not self-settled).