Roundtable discussion.

• Position: Asset protection trusts - The Rise of the International Trust - Panel Discussion

Friday, February 26, 1999 Vanderbilt University Law School Nashville, Tennessee

The Symposium panelists participating in this discussion included David Aronofsky, Barry S. Engel, Eric Henzy, Gideon Rothschild, and Professor Jeffrey A. Schoenblum

Professor Jeffrey Schoenblum:

Welcome to the Roundtable panel discussion. Each of the speakers is going to open with a few :minutes statement. And then we're going to pose some questions to open discussion, so it will take people through the whole asset protection route from beginning to end, hopefully. And then, any questions you may have we believe we'll have sufficient time to ask those questions and have them answered. You may get very different views. And then we've just decided that the jury will decide whether asset protection trusts are a good thing or a bad thing. Okay. So pay attention.

Let me introduce the speakers, also, at this point. The first, David Aronofsky is the General Counsel for the University of Montana, who has written a very interesting piece on Montana's confidentiality law. He will take some time in his remarks to explain just what that is and who it's intended to service.

The next speaker is Gideon Rothschild. He practices in New York City and also happens to. be the chairman of the relevant American Bar Association Committee on Asset Protection. And I believe he's in the process of putting together a book on that very topic.

Our next speaker is Barry Engel from Colorado. Barry has been the president of the Offshore Trust Institute. Frankly, I think some people would claim--I don't know if he would claim--that Barry Engel is the inventor of the offshore asset protection trust.

Mr. Barry Engel:

I'll claim that, sure.

Professor Jeffrey Schoenblum:

He'll claim that. So he's a legend. He doesn't look like a legend. Our last speaker here is Eric Henzy. He is an attorney who represented the trustee in bankruptcy in a very famous case from last year, 1998, the Brooks case, in which he successfully brought onshore assets that the parties had attempted to put offshore in an asset protection trust. This particular case, I think, caused some considerable consternation for proponent's of asset protection trusts, because obviously if you have people like Mr. Henzy succeeding, it puts a major kink in the attainability of the objective sought. The Roundtable will also focus on the new confidentiality act in Montana and also consider the moves by Alaska and Delaware to bring some of the asset protection business and trust onshore. Having seen so much capital flee offshore, is there a way that asset protection can be afforded onshore? Is the onshore asset protection trust as efficacious as the offshore trust, especially since there is obviously a higher comfort level for clients generally with domestic trust administration? On the other hand, are there also certain risks that are not encountered offshore?

So to begin our discussion, why don't we, start with Gideon, please.

Mr. Gideon Rothschild:

Okay. It's a pleasure and an honor to be here at Vanderbilt Law School. I think that the comments I would like to address just in the introductory remarks, is to show you what has occurred in the field, of asset protection planning since I started dealing in this area about eight or nine years ago. And at that time, I got some very disturbing looks from colleagues of mine, esteemed colleagues in the trust and estates area, wondering why I would want to entrench myself in such a speculative area, something that reminded most people of the movie The Firm, that I'm sure most of you have seen or read the book, visioning swaying palm trees in the Cayman Islands and money laundering in one's mind.

The field has developed over the years and I think, as evidenced by the recent creation of a committee on Asset Protection Planning in the American Bar Association, it has obtained a reasonable amount of legitimacy, if you will. Yet, some people still, I think, feel that it might not be a legitimate device to protect individuals' wealth from the reach of future creditors. I think what we need to understand is that this type of planning, whether it's offshore trust planning or merely a transfer to a spouse by those people who feel they might be vulnerable to future creditors, is no different than engaging in what bankruptcy attorneys normally consider as pre-bankruptcy planning, which the Supreme Court has decided is legitimate planning.

In fact, recently there was a case out of, I believe it was Wisconsin, where an individual had purchased annuities only a few weeks before he filed for personal bankruptcy. And the bankruptcy court on the objections of the trustee in bankruptcy, held that the purchase of the annuities was not a fraudulent conveyance, was not done with intent to defraud creditors. And the annuities were exempt from the bankruptcy estate, because under applicable non bankruptcy law, that is under that state's law, annuities are exempt from creditors. Well, what is the difference, in fact, between a situation like that which, I view as actually more egregious, than a situation where you have a doctor who is concerned about the malpractice environment he or she finds themselves in, or is a high profile individual in the community who is likely to be involved in litigation in the future, but has no possible threats hanging over their heads at the present time, what is the problem with taking certain steps that they can take, legally, by using the laws of foreign jurisdictions, thanks to individuals like Barry Engel, who started this all, kind of, in the Cook Islands. By taking advantage of these laws, one can effectively shield one's assets from the reach of future creditors.

The emphasis on future creditors is critical. The cases that you might hear about that have been decided in the. last year or two, which Eric will address in his presentation, I'm sure, and which we'll discuss in further detail, are unfortunately cases which had bad facts. As the saying goes, bad facts make bad law. I hope that the courts don't simply follow the precedent that has been set by these decisions in the last year and a half 1:o judge whether asset protection planning, if you will, is a legitimate objective or not. I think that there has been a misapplication in the law to arrive at the decisions that the court has arrived at, which I think is the correct decision, because under those circumstances what arguably was a fraudulent conveyance, was justified. The decision of the court was justified, that is, in denying a discharge to the debtors.

But under the correct circumstances, there should be nothing wrong with an individual who wishes to protect his assets by using a trust, whether it be an offshore trust or an Alaska trust. And in conclusory fashion, I'd like to simply suggest to you that it is, in fact, perhaps in our public policy interest, to allow individuals to engage in asset protection planning onshore rather than offshore, and enhance the attractiveness of laws like Alaska, like Delaware. In fact, Colorado even has what many people don't know, a version of a self-settled spendthrift trust rule in their own laws for many years, which allows individuals to protect themselves from unforeseen future creditors. And just recently I learned that the state of Texas is considering legislation along the lines of Alaska's Trust Act, to protect self-settled spendthrift trusts. I think that: this trend should be supported by other states under conflict of laws rules, and the reason it should be supported is because the opposite result would otherwise come about, in that individuals would be forced to go offshore to seek certainty in their asset protection, and there will be no recourse to those individuals that have been wronged, because of fraudulent conveyances perpetrated by the likes of debtors who use these vehicles improperly. And I think well hear more about this in the future. And I think I'll just conclude my comments with that.

Professor Jeffrey Schoenblum:

Thank you very much. Barry, do you want to go next?

Mr. Barry Engel:

Sure. Good afternoon ladies and gentlemen, it's a pleasure to be with you here. Nashville is a great place, and. this is a great subject. Certainly one of my top five favorites. And I'd like to give you a little bit of perspective, at least from my point of view, on what asset protection means to me. Kind of like what did I do this summer for vacation.

Let's assume I have a million dollars, big assumption, but let's assume I have a million dollars. I can hold that million dollars in a managed account, whether in the U.S. or overseas. And I can hold that in my own name. And if you're a litigator and you're coming after me, and I suffer a judgment I could kiss my million dollars goodbye, because it'll be gone pretty easily, as soon as the judgment papers hit the particular management firm or brokerage house where the account happens to be. I can rearrange my affairs a little bit, and I can hold that account, let's say, in a limited partnership. And under the law, the fact that I am the now ninety-nine percent limited partner, and the substantial general partner of that partnership means that I no longer own the brokerage account, the funds, I own partnership interests. And under the law, partnership interests are harder to get, less attractive to the creditor. Additionally, I can further rearrange my affairs, and I can have; a trust hold the ninety-nine percent partnership interest, and I can hold an interest as a general partner, thus making it even more difficult for a creditor someday to get.

In asset protection planning, all we really do at the end of the day, is to look at how property is held, and rearrange how property is held so that it's not as vulnerable as it otherwise was prior to our planning. That's what we're doing. And we're doing it at a time when there's nothing, three important words, ]pending, threatened, or expected, with...