This month we will deviate from our usual discussion of United States tax issues to discuss a landmark court case dealing with foreign asset protection trusts.

Are Foreign Asset Protection Trusts Defunct? During the past few months, many articles have been written about the future of offshore asset protection trusts. The genesis of this discussion is a case formally known as the "Federal Trade Commission v Affordable Media LLC'' and generally referred to as the "Anderson case''.

As background, the Andersons received payments for telemarketing work from a third party entity. The Andersons sent their income to a Cook Islands trust that they had created. The Andersons were the settlors of the trust, acted as co-trustees, and also as protectors.

The Federal Trade Commission eventually sued the third party entity for defrauding its customers in a telemarketing scheme. The Federal Trade Commission also asked the Andersons to return the fees that they were paid by the third party entity. The Andersons refused to do so and the Federal Trade Commission obtained a judgment against the Andersons requiring them to return the fees that they were paid.

The Cook Islands trustee refused to send the trust funds to the Andersons, citing the prohibition to do so under the trust documents. The Andersons in turn told the Judge that they had tried to obtain the funds from the trust, but were unable to do so under Cook Islands laws. The Judge in turn put the Andersons in jail for failure to obey the Order of the Court.

Thereafter, the funds were turned over to the Federal Trade Commission, the Andersons were released from jail, and appealed their case. In a devastating decision, the Ninth Circuit Court of Appeals upheld the lower court ruling. In its opinion, the Court of Appeals used phrases such as: "with foreign laws designed to frustrate the operation of domestic courts and foreign trustees acting in concert with domestic persons to thwart the United States courts'' and "foreign trusts are often designed to assist the settlor in avoiding being held in contempt of a domestic court while only feigning compliance with the court's orders''.

What is the Future of Foreign Asset Protection Trusts? There is no consensus as to the future of offshore asset protection trusts. One group of experts state that the Anderson case is the beginning of the end. Another group of experts will argue that the Anderson case is "different'' from the norm and this group also expects the case to be reversed by the Supreme Court.

The former group bases its opinion in part on the theory that the Anderson case gives Judges the right to be wary "of accepting a defendant's assertions that repatriation or other compliance with the court's order concerning a foreign trust is impossible''.

The latter group of experts bases its opinion on the thesis that the Cook Island trust was flawed. They point out that they feel that the trust was defective in its structure, implementation and administration. All of the experts agree that the Andersons should never have acted as either co-trustees or protectors.

The current dilemma facing each of you is whether you will choose to do nothing, and subject yourself to the risks of litigation, or do something to potentially protect your assets. In making your decision, keep in mind that it will take a long time for the case to wend its way through the court system, and for other cases to follow.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Services, PO Box 617, Bernardsville, NJ 07924.

BUSINESS BUC