Avoiding Repatriation and Civil Contempt Nightmares

The primary advantage of offshore planning is the location and control of assets is outside the jurisdictional reach of a U.S. judge. Even if a transfer offshore is determined to be fraudulent, the judge may not have the ability to aid a creditor in retrieving those assets. However, case law has shown that if a judge believes a debtor has the power to repatriate offshore assets (bring offshore assets back to the U.S.), notwithstanding their claims to the contrary, he will issue a repatriation order. Failure to comply with this order can (and has) landed more than one debtor in jail.[i] Furthermore, if a debtor transfers assets offshore after creditor threat has arisen, in an egregious manner, then his ‘self-created impossibility’ of being unable to repatriate assets may not be believed by a judge. In other words, the debtor has placed himself in a position where he doesn’t have the power to repatriate assets, but a judge doesn’t believe his claim of powerlessness, and therefore he has no choice but to spend time in jail due to civil contempt of court![ii]

A few planners have cited examples of these occurrences to mean that offshore planning will, when challenged in court, always subject one to a repatriation order and threat of civil contempt consequences for failure to comply. Case law, however, demonstrates this is simply not so. Even when assuming the offshore transfer is fraudulent, or that the plan otherwise fails, the U.S. Supreme Court notes that a finding of contempt for failing to obey a repatriation order is not always appropriate:

“In a civil contempt proceeding such as this, of course, a defendant may assert a present inability to comply with the order in question. Maggio v. Zeitz, supra, at 75-76; Oriel v. Russell, 278 U.S. 358, 366 (1929). While the court is bound by the enforcement order, it will not be blind to evidence that compliance is now factually impossible. Where compliance is impossible, neither the moving party nor the court has any reason to proceed with the civil contempt action. It is settled, however, that in raising this defense, the defendant has a burden of production.”[iii] [Emphasis is ours.]

An analysis of relevant cases (such as the infamous “Anderson” case[iv]) in conjunction with the above excerpt shows that debtors who were held in contempt were not incarcerated for failing to repatriate assets; rather, their critical blunder was failing to prove their inability to repatriate assets. It is perhaps most important to note that debtors who were subsequently held in contempt, without exception, took extraordinary measures to effect a ‘self-created impossibility’ to repatriate assets, which did nothing but invoke the suspicion and wrath of a judge whose orders were being flaunted.[v]

There are many things that can be done to avoid the repatriation/contempt problem. For example, most U.S.-situs courts are biased against offshore asset protection trusts, since 42 states currently don’t allow self-settled trusts of any kind to provide asset protection. However, an offshore LLC, like a domestic LLC, benefits from charging order protection as long as it is used for a valid business purpose, and is thus a much more acceptable entity in the eyes of a judge. If the LLC then invests cash into an annuity or other policy that’s administered by a large, well-respected offshore insurance company, before creditor threat arises, then a production of the policy contract provides ample evidence that the LLC’s owner is unable to repatriate those assets (and, unlike offshore trusts, we have a reason for the policy besides asset protection!) An operating agreement can also appoint an offshore manager, or at least forbid the LLC members from distributing offshore assets without the approval of an offshore individual (the LLC members who are U.S.-based would ideally never be signers on any offshore accounts, and language should be placed in the operating agreement that shows one of the LLC’s purposes is to build capital within the company. In other words, the LLC’s operating agreement makes it clear from the start that distributions are to be limited.)

Even if additional contributions to the offshore structure are made after creditor threat arises (thus placing more assets offshore), these transfers are likely to be seen as acceptable if a program has been implemented and funded in advance of creditor threat, and the subsequent transfers have a demonstrable economic benefit. Furthermore, offshore asset protection is not the first line of defense for most of our assets. Most assets will be held in domestic entities before creditor threat arises. Therefore any assets placed offshore after creditor threat arises were not the debtor’s in the first place (and thus wouldn’t be subject to creditor attachment unless the domestic entities were pierced); the offshore component is just another layer of protection reinforcing a plan.

To summarize, instead of being obvious about what we’re doing, we are subtle. We use camouflage. We have a bona fide reason for doing what we’re doing besides asset protection. We do things so as to be able to prove our inability to repatriate assets if needed. We have liability insurance that will pay a reasonable amount of the claim, thus ensuring that the plaintiff’s attorney gets an easy payout, which serves to divert him from the tough and uncertain uphill battle he’ll have to wage if he wants any significant portion of the debtor’s personal wealth. We appear to be conducting ‘business as usual’. In fact, we really are doing ‘business as usual’, which is why our program stands up in court.