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The Right Tool At The Right Time.

By Randall K. Edwards - Email Editor

Date: July 06, 2006

One of my most memorable cases involved a client whose father had gone to the doctor because of back pain that hadn't gone away despite earlier surgery that had resulted in metal rods in his back. His doctor sent him to a local hospital where he was to have an x-ray to find out what was going on in his spinal column. Despite the fact that the radiologist needed to get as clear a picture as possible, magnetic resonance imaging (MRI) wasn't available as a tool because of the metal rods

Thus, the radiologist decided to inject contrast media into the backbone itself, which would provide a clearer picture in the x-ray. At the time of this case, there were two commonly used types of contrast media: one with iodine, and the other without. A radiologist had to be very careful in using these types of media with back x-rays because if the radiologist made a mistake and injected the type that had iodine into the backbone, it was almost guaranteed to kill the patient.

The Three Legs.
This medical tool, useful and helpful in the right circumstances - in fact, in most circumstances - became lethal when used in the wrong way and at the wrong time. Unfortunately, the radiologist made a mistake and injected the wrong type of contrast media into his patient's backbone. The patient died seven agonizing hours later, and his family retained me to represent them and his estate. In the end, the case was resolved after the radiologist admirably took full responsibility for his mistake.

I have been thinking a lot about this case lately, as I have had read some appellate cases and engaged in discussions about the use of various Asset Protection tools. Every knowledgeable Asset Protection professional should have a basic understanding of the various tools at his/her disposal. They can be as diverse as statutory exemptions, various corporate structures, limited liability companies, limited partnerships, various types of insurance products (including annuities), "qualified" plans, liability insurance, and a whole host of other options. Each of these tools, when used correctly, can be very useful and beneficial. When used incorrectly, however, they can be lethal to a meaningful and effective financial and estate plan.

Among the tools that has generated a great deal of discussion is the offshore Asset Protection Trust. The reason for this is that there is a line of court cases in which these structures were set up or used incorrectly, or even abusively, and thus the courts (rightly, in my opinion) found the trust grantors to be in contempt of court, even going so far as to jail some for refusing to repatriate assets that the courts believed they had the power to control.

In light of these cases, and some changes in the federal bankruptcy laws, there has been some controversy as to whether offshore Asset Protection Trusts should ever be used, or whether they are doomed as a viable Asset Protection Tool. The answer to that question is not as simple or obvious as it may seem at first blush. The law, after all, is often complex and difficult. It's impossible to give a "one-size-fits-all" answer. Nonetheless, there is no reason to believe that the cases in which offshore Asset Protection Trusts and their grantors got into trouble should necessarily lead to the conclusion that that particular tool shouldn't be used where appropriate.

It's actually not hard to find cases in which almost any Asset Protection, estate planning or financial planning tool was used incorrectly and therefore led to trouble. There are, for example, many cases in which the "corporate veil" protection of a corporation was pierced because the principals commingled funds, didn't respect the formalities that are required, or abused the corporate structure. These cases shouldn't necessarily discourage anyone from ever incorporating again. What these cases should do is to give warning and direction to anyone in the practice area as to things to stay away from, things to do, things to watch out for and ways to avoid problems. For every case I'm aware of in which the corporate veil was pierced, for example, I'm also aware of probably hundreds of cases in which it wasn't pierced or in which the issue of corporate protection simply wasn't at issue at all because the corporate requisites had all been met. These cases usually aren't reported, since they are generally decided at the law and motion phase of a trial, and they usually aren't very controversial (it's sort of like the news cycle in which only a plane wreck gets reported; there's no news in the millions of flights that take off and land safely, since that's what they're supposed to do). In my opinion, the same holds generally true of Asset Protection tools that work. There's not much news in an offshore trust that doesn't get crushed by a court; a limited partnership that doesn't fall apart; a limited liability company whose operating agreement is upheld; and so on. It's only in the rare case in which the whole structure smashes into a brick wall that it hits the headlines and generates endless speculative discussion among planners.

So, while I believe that the offshore trust "train wreck" cases are instructive as to what to avoid, how not to carry out your Asset Protection Plan and how not to try to play "hide the ball" with creditors (especially if that creditor is the government), I'm not sure that they define the entire area of Asset Protection and stand for the proposition that the tools, that the grantors in those cases used wrongly and badly, should never ever be used under any circumstances. To the contrary, I am unaware of any case out there that simply says, "Don't ever use an offshore trust for any reason. U.S. law simply won't allow them." In fact, I believe that it is because offshore trusts work that a few U.S. states (Alaska, Nevada, Utah and a few others), have adopted "domestic Asset Protection Trust" legislation (although I must admit to stepping gingerly when discussing this relatively untested tool right now).

The point is that the wise planner simply has to be careful - very careful.

I fear that some of the esoteric discussion regarding potential problems with offshore trusts or other tools may be read as a wholesale condemnation of the entire tool. That would be a mistake. It's a lot like saying that because you shouldn't try to use a wrench to drive a nail that you shouldn't ever use a wrench for any reason whatsoever. Well, wrenches work when used for the proper purpose - and a monkey wrench (or, as the British call it, an "adjustable spanner") works well for a huge variety of needs. Offshore trusts also work when set up correctly and when used for a proper purpose. So do LLCs, sophisticated life insurance trusts, LPs, homestead exemptions, liability insurance and the whole host of other tools. The cases that say that it was wrong to try to use a wrench to try to drive a nail don't stand for the proposition that it's wrong to use a wrench to tighten a bolt.

Thus, I don't think that the use of an offshore trust, properly drafted and used judiciously by a prudent person who can show a reason for that tool as part of an overall estate and financial plan, is in and of itself going to anger a judge or be struck down as an abusive or illegal tool. It's where some joker gives the finger to a judge and says, in essence, "Despite the fact that I've acted unethically, irresponsibly and idiotically, go ahead and try to get me ... I've socked my money away where you can't get it and you and my creditors can all go pound sand," that an angry judge is going to resort to draconian measures to prove that joker wrong. (Incidentally, it is important to note that even in the situation I just described, the courts haven't gotten the assets back from the offshore trustee; the offshore trusts held up -- although the debtors' freedom didn't necessarily hold up -- and rightly so, in my opinion).

This gets me to a basic rule in financial, estate and Asset Protection Planning: DON'T BE STUPID! The violation of that rule often has much less to do with the choice of the tool used to accomplish an estate, financial and Asset Protection Planning purpose, and much more to do with whether one is obviously trying to cheat people - or, even more stupidly, the government.

Any tool, used correctly and with the correct intent, should have the right outcome. That same tool, used foolishly or maliciously, won't. Using a well-qualified professional to help you find and use that tool is paramount to seeing whether your Asset Protection Plan is a success or whether it turns lethal.

Randall K. Edwards is licensed to practice law in Utah, Nevada, Arizona and California. His practice focuses on business, asset protection, estate planning and selected litigation.

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