Wednesday, October 05, 2005


You Can Hide, but You Can't Run

Much has been written about offshore trusts as vehicles to shield assets from creditors. A tax case from the Southern District of Florida casts a shadow over the use of these offshore trusts for asset protection purposes.

The case, U.S. v. Grant, involved an attempt to shield assets from a $36 Million tax lien levied against Raymond and Arline Grant. In 1983 and 1984, the Grants had created two trusts, one with its situs in Bermuda, the other in Jersey, off the coast of England. Raymond was the settlor of both trusts, with Arline as the beneficiary of one, and Raymond of the other. Raymond died in January, 2005, and Arline became the beneficiary of both trusts.

The taxes at issue grew out of tax shelters that the Grants had entered into and related to years 1977 through 1982, and 1984 through 1987. The taxes were assessed in 1991 and 1993. A final judgment for the taxes was entered in March of 2003. Thus, the trusts were probably created prior to the time much of the tax liability arose. Of course, assets may have been placed into the trusts after it would have become apparent to the Grants that there was a potential of a mamoth tax liability. The opinion does not present any facts as to when assets were actually transferred.

The Government moved to repatriate the funds held in the Grants' offshore trusts in order to pay down a portion of the tax liability owed by the Grants, arguing that the trusts constitute property of the taxpayer which, under federal statutes, can and should be repatriated to the United States. In opposition, Arline argued that the Government does not have the right to order repatriation of offshore trust accounts and that ordering repatriation would violate the laws of the countries in which the trust are held. Arline also argued that she didn't want to repatriate the funds and, that because she had discretion as trustee to repatriate the funds, she couldn't be forced to do so. (The "I won't dance, don't ask me" defense.)

The Court categorized the issue before it as follows:
The only issue here is whether, for purposes of repatriation, the corpus of a trust is any different than funds held in an ordinary offshore bank account, or for that matter, any offshore asset of a taxpayer. Therefore the query must be: is this a trust over which the beneficiary lacks any control, such that the beneficiary is simply that and nothing more, and regardless of what she does or says, she lacks the power to repatriate these assets to the United States?--or, does the beneficiary retain such control that she has the power vested in her in some way by the terms of the trust to repatriate the corpus? If she has such power, then this asset is no different than any other asset.
Needless to say, the Court was not impressed with Arline's arguments. In one paragraph, the Court summarized its analysis as follows:
The owner of an asset cannot avoid the impact of a lawful court order requiring repatriation by saying, "I choose not to do so," any more than any person can avoid the impact of any court order acting directly against his person by saying, "I choose not to do so." The fact that such a person may decide to exercise his will to not make such a choice does not insulate him from the court's power and authority to lawfully order such a choice against the person's desire not to do so. That is the nature and essence of the court's power to act upon the person. The consequences of disobeying such an order are clear. Likewise, if the Defendant here has the power to change trustees or to repatriate assets, she cannot avoid the obligation by saying, "I choose not to do so," without incurring the dire consequence of such an avowed choice. The only question at issue is whether Ms. Grant has the power to effect a repatriation of the trust assets; if so, the court can order her to perform such acts which will in fact result in repatriation, to the same extent it can order any person owning or controlling an offshore account to repatriate the assets to the United States.
Examing the provisions of the two trusts, the Court had no difficulty finding that Arline had the ability to repatriate the assets in the trusts. Accordingly, it recommended granting the Government's motion and ordering Arline Grant to either appoint a trustee in the United States for the trusts, or, alternatively, to otherwise repatriate the assets held in the trusts.

The Grant opinion is only a "Report and Recommendation" by magistrate judge. It has to be formally adopted by the District Court Judge, who could elect to either modify the opinion or reject it altogether. Of course, appeals to the the 11th Circuit Court of Appeals or even the Supreme Court are possible. However, my guess is that the decision will stand. If there is a "formally published" opinion in the case by the District Court or the Circuit Court, the case could mark the beginning of the end of the smoke and magic industry of offshore trusts.

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