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The case is about tax evasion committed by using a foreign asset protection trust (or a “FAPT”). For years certain planners have lauded the likely creditor protection had by using these foreign trusts, but until recently that was only a theoretical protection. Asset protection trusts may still form a good component in an estate plan. However, as this case shows, committing tax fraud will negate any protection benefits achieved by the trust.
Ms. Arline Grant is 84 years old, and has been a widow since 2005, when her husband Raymond passed away. He managed to rack up a $36 million tax liability before he passed. The U.S. government tried to collect from Raymond until his death and, after his passing, from Arline.
In the 1980s, Raymond created two offshore trusts: one in Bermuda and another in the Isle of Jersey (near France). He was the beneficiary of one trust, and Arline was the beneficiary of the other. Raymond managed the trusts, and Arline had pretty much nothing to do with them.
The government wanted Arline to partly satisfy her tax liability using the assets from the foreign trusts.
The IRS attempted to gain access to the assets in the offshore trusts in various ways—it even tried to compel Arline to appoint a new Trustee. And after the government’s lack of success in these endeavors, it moved to hold Arline in contempt of Court until the assets were restored to domestic account.
However, the Court denied the government’s motion to hold Arline in contempt. Basically, the Court reasoned that Arline had little involvement, if any, with the foreign trusts set up by her husband; she committed no tax fraud; and had no undisclosed income. The Court held that Arline had demonstrated sufficient effort to “repatriate the offshore funds.”
Initially, then, it was a victory for Arline. But things changed when she decided to channel funds from the trusts to her children, who would then, per her instruction, pay for her living and other expenses. In particular, there was subsequent evidence that in 2011, Arline received $221,000 from the trusts, even though she previously disclaimed any control she had over them. Doing that constitutes tax evasion.
As a result, in 2012, the government moved the court for a second contempt order against Arline. The government argued that she violated her previous order, requiring her to turn the trust assets over to the government to pay her and Raymond’s past large tax liability.
Arline defended herself by arguing that the prior order did not require that she refrain from receiving the foreign trust property. Further, she repeated her prior (successful) argument that: “I don’t have control to the trusts, so I can’t be held in contempt.” Finally, she pled the equitable defense: that she was old and frail and needed the money to live on.
To her surprise, these arguments were to no avail. The Court was unimpressed: “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.”
The Court expressed its lack of sympathy for the ill, 84 year old widow with these words: “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 with respect to either factor—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 summarized Arline’s actions, saying that she had “engaged in a scheme to avoid collection of her liabilities by having trust funds directly deposited into accounts in her children’s names”—in other words, tax evasion, and “[t]hrough this scheme, [she] dissipated hundreds of thousands of dollars of assets to which federal tax liens attach.”
Arline, despite her illnesses, her age, her crushing tax liability, and the like, must now structurally forfeit the assets in the foreign trusts by requesting a distribution of all trust income, which the U.S. government will subsequently seize.
The lesson? Apparently this: The IRS is blind to age, wealth, and health if you commit tax evasion.