COOK ISLANDS ASSET PROTECTION TRUSTEE SUBJECT TO NEW YORK COURTS JURISDICTION

Southpac is a trust company that operates in several non-U.S. jurisdictions, including the Cook Islands and Nevis. Not by coincidence, the Cook Islands and Nevis have aggressive asset protection laws that seek to attract international asset protection trusts.

A basic planning tenant for a non-U.S. asset protection trust is to use a trust company that has no connection with the U.S., so that a U.S. court cannot obtain jurisdiction over them to compel them to turn over assets in their control. Thus, for example, the use of affiliates of banks and trust companies with U.S. offices is discouraged.

Unfortunately for Southpac, a recent New York Supreme Court case found it to be subject to New York jurisdiction in regard to a Cook Islands trust it is administering as trustee. Generally, in personam jurisdiction in the U.S. can be avoided by restricting contacts with that jurisdiction so that they do not cross the threshold of minimum contact.

Southpac believed it did not have the requisite contacts in New York. In particular, Southpac noted that it:

1) does not own, lease or have any other interest in any real property located in New York; 2) does not have an office in New York; 3) does not have a bank account in New York; 4) does not have any officers or employees in New York; 5) does not have a telephone number in New York; 6) has never filed a lawsuit in New York; 7) has no investments in any business located in New York; 8) is not licensed to do business in New York; 9) has never warehoused or stored inventory or supplies in New York; and 10) does not advertise in New York.

The case at issue involved whether the settlor of the trust fraudulently conveyed assets to the trust so as to defeat the interests in those assets of the settlor’s divorcing spouse. The court’s opinion notes several facts that it believed creates jurisdiction for Southpac in New York. It it is not clear which particular items were critical for the finding, and whether any one of them was deemed sufficient or only all together gave rise to the requisite minimum contacts. These items included:

A. That the transferred assets were originally located in New York;

B. An allegation that Southpac participated in the fraudulent conveyance;

C. That Southpac enlisted the aid of the settlor’s New York broker;

D. That Southpac has an interactive website which invites and promotes fraudulent conveyance transfers; and

E. The transfer occurred after an action with the settlor’s spouse had already commenced.

Some comments on the case:

A. If the mere existence of a website by a business is enough to subject the owner to personal jurisdiction in any jurisdiction with access to the Internet, one has to question whether the concept of in personam jurisdiction has any limitations in today’s world.

B. This is only a lower court case, and thus has little precedential value elsewhere. The finding is subject to appeal and possible reversal. Note that in New York, the “Supreme Court” is not the highest court in the state but instead is a lower court only.

C. Even if it is subject to New York jurisdiction, unless the trustee has assets in the U.S. that a New York court can reach or unless it has offices in jurisdictions that will enforce foreign (i.e., New York) judgments, as a practical matter there may be little the New York court can do to enforce its decrees against the trustee.

D. As a general matter, foreign asset protection trusts work best if they are established at a time when there are no significant pending or current creditors. If established when creditors are already on the scene, they are less effective and may create problems for those who assist in their creation.

Weitz v. Weitz, 2012 NY Slip Op 30767(U), N.Y.Sup.Ct. No. 016811-08 (March 22, 2012)

 

FOURTH DCA: A TRUST CONTESTANT MAY NEED TO CHALLENGE THE WILL, TOO [FLORIDA]

[This post was authored by Sean Lebowitz, Esq. of our office]

In Pasquale, Jr. v. Loving, et. al.,* the Fourth District Court of Appeal determined that a trust contestant must also challenge a will if the trust is incorporated by reference into the will. This is an important lesson for probate and trust litigators.

In Pasquale, the Plaintiffs were served with Notices of Administration and filed a Complaint with the Probate Court within the three month time limitation imposed by Florida Statute § 733.212. The Complaint did not specifically reference the last Will, and instead, focused on several Trust instruments which Plaintiffs were attempting to overturn for reasons of lack of testamentary capacity, undue influence and tortious interference.

The Defendants responded with Motions to Dismiss seeking the Court to dismiss, with prejudice, the Plaintiffs’ Complaint because it failed to attack the last Will within the requisite time frame and doing so was required since the Trust was incorporated by reference into the Will. In other words, the Defendants argued that even if the Plaintiffs were somehow successful in overturning the Trust instruments, the Will would still govern per its incorporation of the overturned Trust into the Will. The Probate Court agreed and granted Defendants’ Motions to Dismiss, with prejudice.

The Fourth District Court of Appeal reversed the Probate Court’s dismissal with prejudice. The Appellate Court agreed with the Defendants’ legal reasoning and arguments – that a trust contestant is required to timely object to the Will if the trust is incorporated by reference into the Will. However, the Appellate Court found under the facts of the case that the Plaintiffs’ Complaint contained enough language that it sufficiently constituted a will contest even though the last Will was never specifically referenced.

While, as a factual matter, the Appellate Court’s decision may be at odds with the strict limitations imposed by the Florida Probate Code as to the requirements to object to the validity of a Will, the Court appeared lenient in interpreting the Plaintiffs’ pleading in order to undo the harsh remedy of a dismissal with prejudice. The lessons learned for probate and trust litigators seeking to challenge a trust instrument are to (a) determine in a pour-over situation whether an action to challenge the Will is also needed by reason of incorporation by reference of the trust in the Will, and (b) to always be mindful of the time limitations to contest a Will which may shorter than the limitations relating to a trust challenge.

 

*Disclaimer: This law firm represents the Appellee/Defendant, CitiTrust, in its capacity as Personal Representative and Trustee in the probate and trust litigation.

Pasquale, Jr. v. Loving, et. al., 2012 WL 933030

SOME DISCLAIMER DOCTRINES YOU MAY NOT KNOW MUCH ABOUT

As a general rule, a disclaimer of property by a recipient results in the property passing under state law or an applicable instrument as if the disclaimant predeceased the transfer to him or her. A recent article discusses two legal doctrines that may apply, if the disclaimed interest is a current  income interest in a trust or a life estate in property. These two doctrines are not well known. Let’s see how these apply in the circumstances of a life income beneficiary of a trust disclaiming his or her income interest.

DOCTRINE OF ACCELERATION. This doctrine provides that if a prior interest is renounced or disclaimed (here, a current income interest), succeeding interests are accelerated, except when the circumstances manifest a contrary intent. Normally, then, when the lifetime interest holder disclaims, the remaindermen immediately succeed to the interest provided for them in the trust that would arise at the normal termination of the lifetime interest (e.g., based on what would occur at the death of the lifetime interest holder).

A circumstance when the succeeding interest may not be accelerated under the doctrine is a life estate to Steve, remainder to Karen, but if Karen is not then living, to George. In normal circumstances Karen would not be entitled to the property unless she survived Steve. If the determination date is moved up, George is eliminated even though Karen may not in fact survive Steve. Some courts may determine it inappropriate to accelerate Karen’s interest and thus cut out George just because Steve disclaimed his interest.

DOCTRINE OF THE NEXT EVENTUAL ESTATE. It is possible that with a disclaimer there is a gap in identifying who is entitled to income. For example, assume a trust provides that Steve is entitled to the income for life, and Karen gets the remainder after Steve’s death but not before she attains age 21. Steve disclaims his interest. Assume that under the Doctrine of Acceleration, Karen’s interest in the income is not accelerated.

There is now a gap as to who receives the income. Possible answers include the grantor of the trust, intestate takers, the residuary legatee, or perhaps the income is accumulated until Karen is 21. The Doctrine of the Next Eventual Estate, when applicable, generally provides that when income is not disposed of and there is no direction for its accumulation, it would pass to the persons entitled to the next eventual estate. Thus, in those states where the Doctrine is applicable, Karen would be entitled to the income after Steve’s disclaimer even if she was not yet 21.

STATE LAW. The application of these doctrines is state specific, and they are often incorporated into state property law statutes. In any case, they should be within the knowledge and lexicon of estate planners.

Unintended Effects of Disclaimers of Income Interests, by Jay A. Soled and Mitchell Gans, WG&L Estate Planning Journal, May 2012