Asset protection and dynasty trusts

(3) Duress Clause. A duress clause directs a foreign trustee to ignore the advice, order, or instruction of a U.S. trustee if such advice, order, or instruction is given under duress, which should be defined in the trust instrument to include court compulsion.

(4) No Benefits Term. The trust might include a provision that provides for a term during which the beneficiaries are solely persons other than the trust settlor. This term may correspond with the limitations period applicable to claims of creditors in the foreign jurisdiction governing the trust.

5. Confidentiality

Early in the planning stages for an offshore protection trust, confidentiality should be stressed to the potential settlor and all related parties. Although information regarding the trust may not be protected from the Internal Revenue Service ("Service") or trust beneficiaries, it can, in many cases, be hidden from third parties who might later become creditors. The planner should strive for confidentiality with respect to the trust's existence, its terms and provisions, its value, the nature and location of its assets, the trustees, and, if applicable, the trust protector's identity and activities, the settlor's and beneficiaries' identities, and the nature, name, and role of any ancillary entities associated with the trust."

6. Offshore Trust Subject to Claims of Creditors

Taxpayers who have established offshore trusts are beginning to discover that those trusts do not always provide the level of creditor protection advertised. The fundamental problem is that a U.S. resident who moves assets to an offshore trust is still personally subject to the jurisdiction of U.S. courts. As in a recent Florida bankruptcy case, In re Lawrence,24 the court may have little sympathy for someone who has, in its view, "stashed" funds offshore.

Lawrence subsequently declared bankruptcy. On August 26, 1999, the bankruptcy court ordered Lawrence to turn over the trust assets to satisfy in part a judgment obtained by Bear Stearns. On September 8, 1999, the bankruptcy court held Lawrence in contempt for failing to turn over the assets, and ordered him to be jailed.28 The court said that because the trust was his own creation, the debtor could not avail himself of the impossibility defense. The court also stated that why Lawrence would transfer $7 million to a trust and release all control "tortured reason and abandoned common sense." Lawrence appealed to the district court.29

The district court supported the bankruptcy court's conclusion that Lawrence had set up the trust for his own benefit. Moreover, it found that Lawrence "effectively had dominion over the property on the Trust, and that the spendthrift provisions [were] not enforceable as a shield against creditors."3" It found that Lawrence's attempt to use an offshore trust contravened "the clear public policy against allowing a debtor to shield money placed in a trust for his or her own benefit from creditors, defied common sense, and was undermined by language in the trust that gave Lawrence the power to remove and appoint trustees."31