Asset protection and dynasty trusts

Lawrence and Affordable Media do not spell the end of offshore asset protection trusts or the domestic protection trusts currently available in Alaska, Delaware, Nevada, and Rhode Island. However, they do reveal some limitations. The Andersons and Lawrence appear to have been involved in fraudulent schemes. U.S. law generally voids a transfer in fraud of actual or foreseeable creditors. Courts are inclined to retain this approach with offshore asset protection trusts even if local law governing the trust is different. Moreover, both the Andersons and Lawrence appear to have retained too much control. In the case of the Andersons, they acted as both trustees and trust protectors for their trust. Lawrence had the power to remove and appoint the trustee. Both the Andersons and Lawrence failed to follow the general rule that the less the amount of control retained, the greater the protection afforded by an asset protection trust.

7. A Final Word of Caution

A client should not expect that an offshore protection trust will provide perfect protection against the claims of creditors. If the creditor has a skilled lawyer, the existence of the foreign trust usually will become known. A litigious and determined creditor can make life very difficult for a debtor who has offshore assets and refuses to settle in some manner with the creditor. The creditor, for example, can force the debtor into involuntary bankruptcy and persuade the court to refuse to discharge the debtor until the debtor gives up some of the assets in the offshore trust. As related by a colleague, this situation apparently happened to a Texas man who had an offshore trust. The judge kept the man in bankruptcy and ordered that he obtain court approval for any expenditure he planned to make, including, for example, buying groceries, so the court could determine the source of the funds and whether any portion could be given to the creditor. Moreover, some local courts may interpret their laws narrowly to minimize the possibility of their jurisdiction being viewed as a rogue country vis-avis the international community.

IV. FRAUDULENT CONVEYANCES

Most states have adopted a version of the Uniform Fraudulent Transfer Act ("UFTA").36 One must consider these provisions when engaging in any asset protection planning that involves transferring property to a third person, including the trustee of an offshore protection trust.

A. Fraudulent Conveyances as to Existing Creditors

Under UFTA, a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if

(1) the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor was insolvent at that time, or the debtor became insolvent as a result of the transfer or obligation;37 or

(2) the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.38