Asset Protection Planning – Be Careful What You Ask For

When speaking of asset protection planning, I often talk about the seven levels of asset protection planning (click here for more information).  Levels six and seven are domestic asset protection trusts (DAPTs) and foreign asset protection trusts (FAPTs) respectively.  Recently, we learned again the importance of proceeding with extreme caution when entering into these more complex trusts.   A recent article in Forbes Magazine by Jay Adkisson discussed in greater depth one of the biggest problems with DAPTs and FAPTs.  The problem with DAPTs or FAPTs is not that they don’t protect your assets from creditors, but that you may not be able to get at those assets either.The article discussed a recent case involving Arline Grant and her late husband Raymond Grant .  Raymond had set up a couple of FAPTs that Arline had no involvement in.  Subsequently, a $36 million tax judgment was entered in favor of the United States.  By then Raymond had passed on.  The United States tried and failed several methods to dislodge monies from the off shore accounts.  None worked and the U.S. ultimately sought to have Arline held in contempt of court.  The request was denied by the Court citing Arline’s inability to require the Trustee of the FAPTs to repatriate the funds.  Unfortunately for Arline this was not the end of the story.  What people often forget about Judgments is that they don’t go away.  They can be renewed again and again as the Creditor simply waits until an opportunity arises.  That opportunity came for the United States when Arline, who had been unable to “repatriate” assets pursuant to the Court order, was somehow able to get the Trustee to “distribute” $221,000 directly to her children.A second contempt order was sought by the United States and this time the Court was not so sympathetic to Arline.  Arline’s arguments included a claim that she desperately needed the money to live on.   The Court wrote:"That Mrs. Grant is ill, is eighty-four years old, and will no longer be able to use trust funds to “pay for her immediate living expenses and attorneys’ fees” or “provide for [herself] in a very modest fashion” means little . . . — the record shows Mrs. Grant continues to receive the exempt portion of her Social Security benefits, and that she has children who care for her, or at the very least, follow her instruction."The Court proceeded to find in favor of the United States and compelled not only her, but her children to turn over any assets received from the trust.  It also required her to request quarterly distributions from the Trust and prohibited her or anyone else from receiving any of the Trust’s assets without turning them over to the United States.  While there may have been a lot off shore, Arline is now forced to live on very little.The moral of this story is that while DAPTs and FAPTs may sound appealing and may even be promoted as a wonder pill, they are most certainly not.  Like any advanced planning technique, they should only be used in the right circumstances, which are often quite narrow.  So when you travel down the asset protection planning path there are many things you can do, but be careful what you ask for.  You just might end up with assets that are not only protected from creditors, but also from you.