Offshore Trust Fails To Protect Debtor's Assets In Orlando Bankruptcy Proceeding
I typically do not advise my clients to rely on onshore trust for asset protection, especially when a client is considering bankruptcy. Bankruptcy courts have worldwide jurisdiction over all the debtor’s assets, and here is precedent supporting the authority of bankruptcy courts to pursue trust assets moved outside the U.S.
Simply stated, offshore trust promise asset protection because the settlor appoints a trustee located beyond the jurisdiction of U.S. courts. If a bankruptcy court would order a debtor to bring back the trust assets or face contempt the debtor, in theory, would show that he is unable to comply with the court order because he has no control over the trust assets.
Without offshore trust planning, things usually do not go according to plan, especially in bankruptcy courts. A recent offshore trust failure occurred in a central Florida bankruptcy case. A bankruptcy judge directed a debtor to repatriate all money in his offshore trust and freeze trust accounts. The court found that the trust agreement gave the debtor power to control the trust or the trustee, and therefore, the debtor could do what was necessary to bring back the money.
Debtor’s are reluctant to truly give up control over the money; I suspect that in this case the trust agreement left the debtor with some control over his assets. Anticipating that the debtor would argue that he lacked the ability to bring back the assets and would assert an “impossibility” defense to contempt sanctions, the court said that it would not accept the debtor’s “impossibility” defense because the impossibility was self-created.
Bankruptcy is a last resort for all debtors. In many ways, a debtor’s defenses are greater in state court than they are in bankruptcy courts. State court judges do not have jurisdiction over assets located outside their state, and in state court there is no independent trustee who will assume the task of chasing assets with no cost to the judgment creditor. Offshore trust planning is more effective in state court, and even there, a sufficiently motivated and funded creditor can attack offshore asset protection planning. In Re Advanced Telecommunication Network, Inc. 6:03-299
