Contempt Orders Against Debtor

Can you, a U.S. resident and a settlor of the Offshore Trust, be ordered by a court to return assets transferred to the offshore account? A judgment creditor would certainly like to obtain such an order from the local court and whether he can do so depends upon the terms of the trust.

Clearly, if you have the right to retrieve the assets, a judge will order you to do so. Judges back up these orders with the power to hold a person in contempt of court for refusing to comply. The sole issue then is your legal ability to return transferred property pursuant to a court order.

This issue is resolved, in a properly drafted trust, by not giving the settlor any such power to revoke the trust or reacquire the assets without the consent of the trustee. Although the trustee typically will comply with the wishes of the settlor, the trust agreement requires the trustee to disregard any communications issued by the settlor under duress. That is, if the settlor is ordered by a court to communicate with the trustee, the trustee is required by the terms of the trust to ignore such requests for action.

As a result of this structure, the settlor has no legal right to revoke the trust and reacquire trust assets. A court cannot logically compel an action that an individual has no power to perform, and the foreign trustee will not respond to orders from a court outside of its jurisdiction. The conclusion is that the assets of the trust are protected, and the settlor should not be in contempt for failing to achieve a return of the property.

The result may be different when the Offshore Trust is used as a scheme to defraud creditors or the IRS, or to protect the proceeds of criminal or fraudulent activities. In these cases, where the defendant is perceived as a "bad guy," the judge may ignore the provisions of the trust document and apply the leverage of a civil contempt order. (See FTC v. Affordable Media, LLC.) The Offshore Trust is not designed to allow individuals to defraud others or engage in tax evasion or criminal conduct. If the trust is used for an illegitimate purpose, significant legal pressure—including contempt sanctions—may be brought to bear on the offender.