Offshore Trust Cases – Trading Jail for Protection?

Offshore trusts continue to be an effective asset protection tool, including in bankruptcy, tax litigation, and divorce situations, even when the facts are not favorable to the trust grantor.  The catch, however, is that you might have to some time in jail for contempt of court before you and your money are reunited.

Here are three cases arising out of Florida:

In re Stephan Jay Lawrence, 238 B.R. 498 (Bankr. S.D. FL 1999).  Stephan Lawrence set up and funded an offshore asset protection trust just weeks after an arbitration award against him for over $20,000,000 due to a margin account deficit due to the 1987 stock market crash.  Lawrence then filed bankruptcy.  The court discredited Lawrence’s testimony that he was no longer a beneficiary of the trust and found that he still had control over the trust, including the power to repatriate the trust assets.  Lawrence was held in contempt and jailed for not complying with the order to repatriate.

Lawrence remained in jail for about six years, after which time he was released by the court, based on a ruling that there was no realistic possibility that Lawrence would comply with the order for repatriation.

Anchor United States of America v. Raymond and Arline Grant, Case No. 00-08986-Civ-Jordan (S.D. FL 2005).  Raymond and Arline Grant had offshore trusts in Bermuda and Jersey, Channel Islands.  In litigation with the IRS, the court ruled that the trust language permitted repatriation of the assets, and a judgment was entered against Mr. and Mrs. Grant for over $36 million in back taxes.  The IRS failed to bring about repatriation on its own efforts.

Mr. Grant subsequently died, but in May, 2008, Mrs. Grant was ordered to show cause why she should not be held in contempt for failure to follow the repatriation order.  Based on Mrs. Grant’s demonstrated, but unsuccessful, efforts to achieve repatriation by contacting the trustees and requesting their cooperation, the court denied the order to show cause, finding that Mrs. Grant had sufficiently established her inability to repatriate the assets.

Morris v. Morris, Case No. 502005CA006191XXXMB (Circuit Court, 15th Judicial District, Palm Beach County, Florida, 2006).  Leland and Merry Morris entered into a post-nuptial agreement in July 2001which set forth child support obligations for both.  The agreement provided that if Mrs. Morris were to challenge any provision of the agreement after divorce, the Mr. Morris would be entitled to $1 million in cash, the marital residence, and all prior alimony payments.

The parties divorced the next month, and Mrs. Morris filed an action to modify the child visitation arrangement.  Mr. Morris counter-claimed, and obtained a judgment against his ex-wife for the above-described property.  Mrs. Morris then established and funded a Cook Islands trust.

Thereafter, Mrs. Morris was repeatedly held in contempt of court for failing to appear at hearings and failing to follow court orders.  From December 2005 through January 2008, when she turned herself in, she could not be found at all.  After about five months in jail, Mrs. Morris was released when parties reached a settlement in which Mrs. Morris agreed to pay $1 million of the $2.5 million she owed to Mr. Morris to a trust for the children’s benefit.  This was only possible, however, because the couple’s children were also express beneficiaries of the Cook Islands trust, allowing the trustee to comply with Mrs. Morris’ request.

Comment: In all three of these cases, the offshore trusts enabled the grantors to retain some or all of the protected funds despite their flagrant behavior.  Obviously, offshore asset protection trusts will provide better results when done before any source of liability has arisen.

 Source:  Recent Developments in Contempt Law Involving Offshore Trusts, Insights & Strategies, April 2009, by Barry S. Engel, Esq. and Eric R. Kaplan, Esq.