ASSET PROTECTION ISSUE:

Will an Offshore Asset Protection Trust hold up against an IRS attack?

CASE SUMMARY:

The facts are that Mr. Grant established two separate trusts, one for himself and another for his wife, Arline, in two separate offshore asset protection jurisdictions. He then proceeded to do two things:

  1. Stiff the IRS for $36 million
  2. Die

Firstly, stiffing the IRS for $36 million should already tell you that this is not the kind of case either side should be citing as precedent.  The IRS is no usual creditor and $36 million is no usual amount.   Much like the Anderson case, having the U.S federal government as the Plaintiff and having amounts in the tens of millions of dollars are simply bad facts that make bad law.

Nevertheless, these are the facts, and through the U.S. Courts the IRS has aggressively pursued Arline which makes this case very interesting for our purposes.

TRIAL RESULT:

The original trial was concluded in 2005, at which Mrs. Grant was directed to request that the Trustee repatriate the assets for the valid and enforceable debt to the IRS.  Mrs. Grant complied explicitly with the court’s request including an effort to change Trustees when the current Trustee was unwilling to comply.  She was unsuccessful for over two years.

In 2008, the government alleged that Mrs. Grant failed to comply with the repatriation order and sought further remedy.  To this the judge had the following to say:

“I understand that it has been more than two years since the repatriation order was issued and that the funds had not yet been repatriated. But this failure is not for a lack of effort. I am reluctant to fault Mrs. Grant for her trustees’ denial of her requests to repatriate the funds.  Accordingly, I find that Mrs. Grant has sufficiently established that she is not able to repatriate the offshore funds and deny the motion for an order to show cause.”

SCORE ONE FOR OFFSHORE TRUSTS AND THEIR HARD-HEADED TRUSTEES!

That would have been a happy ending had not one small event occurred.  Apparently feeling pretty good after all this, Mrs. Grant did, in fact, make a request for distributions which was complied with by the Trustee to the tune of a mere $221,000 paid to her children’s accounts.

This was enough to set the IRS back at her, and, in January of 2012, they filed a second motion to compel Mrs. Grant.  To this the court had a different tune in saying:

“That Mrs. Grant has since been able to repatriate funds to her children’s bank accounts in the United States, but failed to expressly and timely inform Plaintiff’s counsel or the Court of that fact, brazenly flouts the authority of the Court. * * * [T]he Court could not have been any clearer: repatriated funds were to “pay down” the Grants’ tax liability to the Plaintiff. The use of repatriated funds for other purposes, including for Mrs. Grant’s “general sustenance” . . . runs plainly afoul of the Court’s Order.”

SCORE ONE FOR THE TIRELESS EFFORTS OF THE IRS!

LINK TO CASE DOCKET: http://www.leagle.com/decision/In%20FDCO%2020130422H56

ASSET PROTECTION SUMMARY:

So how should this be interpreted from an Asset Protection Standpoint?  The bottom line is that the millions of dollars is still not in the hands of the IRS. This remains true even when they have been relentless and extremely aggressive.  Mrs. Grant also can’t access the money due to a very severe injunction placed on her.  So it would appear to be a stalemate.

The trump card, however, I believe is held by Mrs. Grant.  Possession is 9/10th of the law, and clearly she has the possession as a beneficiary of the Trust.  This leaves her with a few options.  She could choose to move out of the country and live freely on the wealth in the south of France.  Alternatively, she could ‘negotiate’ a settlement between the Trustee and the IRS, likely leaving her with enough of the assets to live comfortably on for the duration.

Finally, she could simply turn all of the assets over to the IRS, leaving her in no worse position than if she had no trust to begin with.

In any case it is very difficult to say that this has not been an overall win for her.  She has the money, and the IRS does not.  Without a Trust this simply would never had been the case with a $36 million debt against the mother of all creditors – the IRS.

TAKE AWAY:

There are two major lessons here.  The first is that this trust did have a major drafting flaw.  Mrs. Grant was given the “non-reviewable, sole and complete discretion to remove and replace the Trustee at any time.“  This was a fatal flaw and could have been corrected with the simple addition of a term which made that power viable only when not acting under duress – which she clearly was during the proceedings.

The second lesson is that the IRS is not your average bear.  I would say they are likely the only creditor who would ever have had the energy and money to pursue this case as aggressively as they did, and that virtually any other ‘normal’ creditor would have given up long ago.  So when it comes to asset protection the IRS (federal government) must be seen in a special light.

If you are still confused,  just ask yourself, “If I were Mrs. Arline Grant, knowing what I know now, would I still have wanted the Trust or not?”  The answer to this question will tell you if this planning worked for her or not.

CategoryCase Summaries

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