Friday, April 26, 2013

BAD PLANNING IN FOREIGN ASSET PROTECTION TRUST SCENARIO

Foreign asset protection trusts are often established by U.S. persons to shield their assets from creditors. Typically, assets transferred to the trust can be paid to or applied for the benefit of the U.S. grantor(s) and their family members only in the discretion of the trustee. The trustee is typically a trust company situated in the foreign jurisdiction. So that the grantor has some measure of control over the situation, the grantor typically has power to remove and replace the trustee. Thus, if the trustee is uncooperative, the grantor has the ability to try to find and install a more cooperative one.

In a recent South Florida case, the U.S. government is a creditor of a deceased husband and his wife. The wife is a discretionary beneficiary of non-U.S. trusts, and she has the power to change trustees. The IRS has a lien on the trust assets – however, since the assets are situated outside of the U.S. with a non-U.S. trustee, the U.S. courts have no jurisdiction over the foreign trustee.

The bad planning in this situation is that the wife has the power to appoint a trustee situated anywhere in the world (including in the U.S.). Thus, the court is now ordering her to exercise that power to remove the current trustee and replace it with a U.S. trustee. Once that is done, the trustee will be within the jurisdictional reach of the court, and the assets of the trust will be reachable.

A better plan would have been to limit replacement trustees to those situated in the jurisdiction of the trust, or at least to jurisdictions outside of the U.S. Further, taxpayers should not engage in transfers that put assets beyond the reach of the IRS – such activities can result in criminal liability.

U.S. v. Grant, 2013 WL 1729380 (S.D.Fla., April 22, 2013)

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