Some clients arrive to meet with their Estate Planning attorney with an article in hand claiming that a particular firm, company, or other attorney creates a “bulletproof” asset protection vehicle, often involving some form of “asset protection trust.” This puts the attorney in the awkward position of reviewing the article, then explaining why the method advertised may not have the intended result, and that the attorney will not undertake such planning because these schemes rarely work and come with significant drawbacks. In truth, few asset protection strategies offer an iron-clad solution to every problem. Asset protection planning, like estate planning, requires an understanding of the issues facing the client, knowledge of the various options available for the client based upon the situation, and follow through. The first part of this two-part series The Intersection of Asset Protection Planning and Estate Planning – Part I explored some of the most common asset protection techniques along with their benefits and detriments. This second part will focus on foreign trusts and a situation that went terribly wrong.
Clients may think that foreign trusts present a great asset protection vehicle, but many attorneys shy away from the use of foreign trusts for good reason. Some lack the knowledge or contacts to implement the plan, others take a conservative approach to Estate Planning. Yet some venture into foreign trust territory as a viable method of asset protection planning. Foreign trusts come with their own set of problems. Usually, the things that seem too good to be true are. That’s often the case with a foreign trust. A recent divorce case heard in the Illinois Appellate Court, First District, Third Division, In re Marriage of Harnack, provides yet another cautionary tale for anyone considering utilizing an offshore trust.
Harnack focused on the divorce proceedings of Pamela Harnack (“Harnack”) and Steve Fanady (“Fanady”). The original court hearing the matter entered a default judgment against Fanady finding that he has $7.3 million in assets while Harnack suffered health issues, had minimal income, and was unable to support herself. The court awarded 120,000 of Fanady’s 280.000 shares of stock in the Chicago Board of Exchange, Inc. (hereinafter the “Stock”) to Harnack. Fanady attempted to set aside Harnack’s default judgment and lost because, among other bad acts, Fanady hid assets overseas, failed to participate in the divorce proceedings, and engaged in underhanded efforts to prevent Harnack from receiving her share of their marital assets. The litigation between Fanady and Harnack continued and included several appeals and a trial. On December 11, 2020, the court ordered Fanady to transfer the Stock to Fanady within a week. Of course, Fanady appealed and lost. Shortly after the date by which Fanady was to transfer the Stock, Harnack initiated a show cause hearing for Fanady’s failure to comply with the court’s order.
Fanady claimed that because all his assets were held in a trust located in Belize that he could not comply with the order. Fanady asserted that he was unaware of what assets the trust held and that although the trust paid his living and legal expenses, he had no way to access the assets therein. Further, although Fanady sent a copy of the order to the offshore Trustee, the Trustee refused to comply with the order because Fanady was under “duress.” Offshore trusts often employ this tactic to prevent a creditor’s access to the trust assets. At a subsequent hearing, the court found that Fanady could comply with the order and was in contempt for failing to do so. The court ordered Fanady jailed until he transferred the Stock or its cash value to Harnack. Fanady responded to the order by claiming it was impossible for him to comply. This defense represents yet another commonly employed tactic when dealing with an offshore trust: the “impossibility defense.” It sounds great, yet rarely works.
The impossibility defense fails because the debtor creates the impossibility by moving his assets offshore. This, the individual facing contempt cannot comply with the order because of their own voluntary actions. For that reason, such individuals cannot avail themselves of the impossibility defense. When Fanady made this argument, the court disallowed his use of this defense because he created the impossibility by voluntarily moving his assets offshore. Fanady was incarcerated on June 28, 2022 over his objection and as of this writing remains there. Courts have long demonstrated their unwillingness to allow a self-created impossibility as a defense to contempt. For what it’s worth, the jurisdiction used to create the offshore trust matters not.
While this article examines a particular case that demonstrates the flaw in using a foreign trust, they work well in others. The first occurs when the debtor leaves the United States with the intent to remain overseas either indefinitely or until resolution of the creditor issues. The second happens when the debtor uses the foreign trust to force settlement negotiations with those creditors without the time, resources, or desire to pursue a contempt order against the debtor. Finally, offshore trusts make sense for international families with overseas interests. They make less sense for a wealthy individual living in New York, or elsewhere, with no plan to cut ties with the United States should the creditors come calling. The basic tenants of asset protection planning match those of Estate Planning generally; not every solution or technique works for every individual. Good Estate Planning attorneys listen to a specific set of facts and circumstances and craft a plan that meets the client’s needs and addresses the client’s most pressing concerns.
Asset protection planning has legitimate uses. When done properly, asset protection planning removes a client’s assets prior to problems arising which protects the assets before the issue occurs. If that claim has occurred or the client knows that it will, the asset protection ship has sailed and any acts to protect those assets constitute fraud on creditors which has dire consequences both for the client and the attorney assisting the client.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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