One of the best ways to protect wealth you simply can't afford to lose in a frivolous lawsuit is with an offshore trust.
However, there's a right way—and a wrong way—to form an offshore trust. And a Florida resident named Mary Morris is the newest poster child on how NOT to form and use an offshore trust. Yet, in spite of her mistakes, her offshore trust saved her a cool US$1.5 million.
You may remember Mary from an earlier blog entry a few months ago. At the time, Mary was languishing in the Palm Beach County Jail. It looked as if she might remain there indefinitely unless she came up with US$2.5 million for child support payments and attorneys' fees.
Now Mary's out of jail, and it cost her only US$1 million...in spite of very poor asset protection planning.
Here's a brief summary of the very convoluted story:
Back in 2001, Mary and then-husband Leland Morris divorced. Leland won custody of their two children, but feared Mary would abscond with them in violation of the divorce decree. He offered Mary a US$1.5 million "bonus" payment if he became their primary caregiver. But, if Mary contested the agreement, she had to repay the bonus.
However, in in 2003, Mary challenged the divorce decree and demanded more money. But proving contracts you sign do have meaning, the judge in the case ordered Mary to pay Leland US$1.8 million—the bonus plus US$300,000 of attorneys' fees.
Mary didn't pay. And, she didn't bother showing up for a court hearing to explain why. The judge issued a criminal contempt citation, ordering her to jail until she came up with the money.
Before deputies could pick her up, Mary disappeared…for almost five years. But in January 2008, Mary reemerged. Shortly thereafter, she wound up in a Palm Beach County prison cell. By then, the judgment had grown to US$2.5 million.
The Wrong Way to Form an Asset Protection Trust
And here's where the story gets even more interesting. In the midst of litigation with Leland, Mary formed a Cook Islands offshore trust and transferred virtually all of her assets to it. She claimed that the money now belonged to the trustee, and that she had no way to repay the judgment. And, presumably in accordance with the terms of the trust, the Cook Islands trustee refused to satisfy the judgment.
Mary's transfer of assets to the trust arguably constituted a "fraudulent conveyance;" an effort by a debtor to "hinder, delay, or defraud" a creditor. And, back in Palm Beach County, this didn't make the judge very happy. That's particularly true because, during her absence, Mary lived outside the United States on distributions from the trust.
Fortunately for Mary, the story has a relatively happy ending. Over the last few months, her attorneys held a series of meetings with Leland's attorneys on how to resolve the impasse.
They finally came to an agreement. If Mary could somehow persuade the Cook Islands trustee to release US$1 million, Leland agreed not to seek the additional US$1.5 million.
Subsequently, Mary contacted the trustee and asked it to convey US$1 million to satisfy the agreement. And, guess what? The trustee transferred the US$1 million to the custody of the court. Mary is now free and presumably a lot less contrary than before.
Don't Go to Jail to Protect Your Assets
If nothing else, Mary's tale demonstrates that an offshore trust may be more effective at protecting your assets than in keeping you out of jail. If you don't give up control over your assets, or if you form the trust after a liability arises, you may have some explaining to do in front of a judge.
In these situations, there’s a risk that a U.S. court could order you to repatriate the trust assets for your creditor’s benefit. If you fail to do so, the court could cite you for contempt, and in extreme cases, order that you be jailed until you comply. That's what happened in Mary's case.
In spite of her protests to the contrary, Mary persuaded the Cook Islands trustee to make a payment to satisfy a domestic judgment. The judge was 100% correct in holding her in criminal contempt. (Of course, the trustee will deny this, and state that the payment was merely a prudent exercise of its discretionary authority.)
Fortunately, by avoiding the abusive circumstances in Mary's case, an offshore trust can protect your assets—and you won't go to jail. Indeed, of all the instruments available for asset protection, an offshore trust is one of the best.
Want to learn more? I'll be reviewing the top jurisdictions for offshore trusts in the August issue of The Sovereign Individual, The Sovereign Society's member's only newsletter. If you're not already a member, you can sign up for a risk-free trial membership here.
Copyright © 2008 by Mark Nestmann
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