OFF SHORE TRUSTS – Ethical Violations of Off Shore Trusts – PART 2

Off Shore Trust

In order for the attorney to avoid ethical violations and the possibility of civil and criminal liability, he must be careful in accepting new clients and in advising and servicing them.  The basic concept that should be employed is the performance of due diligence.

The due diligence procedures should generally include the following:

  • a retainer letter, signed by the client, which includes,
    • definition of a fraudulent conveyance under local law,
    • potential consequences of the making of a fraudulent conveyance,
    • the attorney will not assist the client in any transfer which he believes may constitute a fraudulent conveyance,
    • the attorney is relying on full and continuing disclosure by the client in the attorney’s assessment of whether the transfers at issue are, in fact, permissible, and
    • a breach of the client’s required full and continuing disclosure will constitute grounds for the attorney to resign as counsel;  BNA 810 2d
  • investigate the client’s financial condition,
    • obtain client’s financial statement,
    • determine whether the client, or any company the client has been closely connected to, has ever filed for relief in bankruptcy,
    • determine if the client’s federal, state and local tax reporting is current, and
    • determine if the client is currently being audited by any tax authority.
  • examine all client debts, liabilities, and obligations
    • determine whether the client has any direct or indirect liability for any loan,
    • determine if there are any contingent liabilities;
    • gather information about client’s historical method of doing business; and
    • investigate the client’s general reputation among business;
  • perform a solvency analysis;
  • the client should provide the following documentation for review,
    • copies of the client’s most recent personal income tax returns, as well as a current personal financial statement, and
    • if the client is closely connected with any company, copies of that company’s most recent income tax returns, as well as a current financial statement of the company;
  • the client should provide personal references from one or more of the following:
    • primary banker,
    • the client’s personal attorney,
    • personal accountant and,
    • personal tax return preparer;

The attorney must be knowledgeable about all aspects of a client’s wealth and objectives.  This knowledge will aid in determining the benefits of an offshore trust and influence the way the plan is structured.


The reasons for creating an offshore trust should be discussed with the client.  The motivations for the creation of an offshore trust generally fall into one of four classes: (1) asset protection; (2) economic or investment issues; (3) tax or estate planning issues; and (4) personal or family issues.

  1. Asset Protection
  2. Economic or investment issues may be as follows: 
  • economic diversification;
  • participation in investments not otherwise available to U.S. investors, and
  • liability protection, tax planning, or strategic advantage in the context of an active trade or business abroad.
  1. Tax or estate planning issues including:
  • transfer tax planning;
  • perpetual trusts;
  • income tax planning;
  • accessing the offshore life insurance market; and using a foreign qualified personal residence trust.
  1. Personal or family issues including:
  • planning for the contingency of changing one’s domicile or citizenship;
  • the achievement of a “low profile” or anonymity with respect to wealth;
  • the avoidance of forced dispositions;
  • premarital planning; and
  • marital property planning.

Possible Attorney Liability

Civil Liability


A “civil conspiracy” is defined as a combination by two or more persons to commit an unlawful act that causes damage to a person or property.  Black’s Law Dictionary 305 (7th ed. 1999).

The separate of civil conspiracy include:

(1) an agreement between two or more persons;

(2) to participate in an unlawful act, or a lawful act in an unlawful manner;

(3) an injury caused by an unlawful overt act performed by one of the parties to the agreement;

(4) which overt act was done pursuant to and in furtherance of the common scheme.   Ryan v. Eli Lilly & Co., 514 F. Supp. 1004, 1012 (D. S.C. 1981).

The agreement in a civil conspiracy is neither wrongful nor actionable.  The action is for damages occurring from the acts committed pursuant to the conspiracy.   Onderdonk v. Lamb, 79 Wis.2d 241, 255 N.W.2d 507 (1977).

Generally, if the attorney’s only connection to the fraudulent transfer is as the recipient of a portion of the client’s transferred assets as a legal fee, he will not be held liable.  If the attorney receives more than payment of a past due fee, that additional consideration carries the possibility of the him being found liable in civil conspiracy.

Aiding and Abetting

Aiding and abetting is when a defendant knowingly gives substantial assistance to someone who performed wrongful conduct.  Halberstam v. Welch, 705 F. 2d 472 (D.C. Cir. 1983).  It is not whether or not the defendant agreed to join the wrongful conduct.

The aiding and abetting liability elements are: (1) the party whom a defendant aids and abets must perform a wrongful act that causes injury; (2) the defendant must be generally aware of his or her role as part of an overall tortious activity at the time that he provides the assistance; and (3) the defendant must knowingly and substantially assist the principal violation.   Id.


The attorney must have failed to exercise the care, skill, and diligence that are commonly exercised by other attorneys practicing in similar situations in order to be found liable for malpractice.  The attorney who asserts specialization in an area of law will normally be held to the higher standard of care that other legal specialists practicing in the same area. Legal malpractice looks to the potential of the attorney being held liable to his own client. /Footnote/

Criminal Liability

The Federal Bankruptcy Code states it is a crime when a person, “in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation.”   18 USC §152.  The defendant may be fined up to $5,000 or sentenced up to five years in jail or both if found guilty.   Id.  The use of the term “knowingly” appears to require specified knowledge or intent before criminal liability may be imposed.  The knowledge requirement may be met by showing “willful blindness.”  The defendant may be subject to being charged with obstruction of justice.

B.  Fraudulent Transfers

The Uniform Fraudulent Transfer Act (UFTA) is patterned after Section 548 of the Bankruptcy Code.  Illinois adopted the UFTA on January 1, 1990 and is codified at 740 ILCS 160/1 et. seq.

1.      Definitions /Footnote/

The most common occurrence of a fraudulent conveyance is a transfer made with the intent to hinder, delay or defraud a creditor.   740 ILCS 160/5(a)(1).  A transfer made without fair consideration by a person who is insolvent, or who will become insolvent because of the transfer, is considered a fraudulent conveyance.  740 ILCS 160/5(a)(2).  The UFTA states a “debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.”  740 ILCS 160/3(a)Also, a person is considered insolvent if he is not paying his debts timely.   740 ILCS 160/5(b).

The term “transfer” is defined as including “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”   740 ILCS 160/2(l).

A current creditor does not need to establish the debtor intended a transfer to be fraudulent.  The creditor only needs to prove the assets were transferred without receiving an equivalent value in exchange and the debtor was insolvent at the time of the transfer or became insolvent because of the transfer.   740 ILCS 160/6(a).

2.      Badges of Fraud

The courts have allowed various badges of fraud to be considered as proof of intent because of the difficulty in proving intent of a fraudulent transfer or conveyance.  one of the following factors, individually, may be considered proof of intent.  However, an aggregation of a number of the following badges may serve as a determination of the debtor’s intent.  These factors are as follows:

  • Whether the transfer or obligation was to an insider;
  • Whether the debtor retained possession or control of the property transferred after the transfer;
  • Whether the transfer or obligation was disclosed or concealed;
  • Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
  • Whether the transfer was of substantially all of the debtor’s assets;
  • Whether the debtor absconded;
  • Whether the debtor removed or concealed assets;
  • Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
  • Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
  • Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and
  • Whether the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 740 ILCS 160/5(b).

The UFTA offers several remedies when a fraudulent transfer is alleged to have been made.  Some of the remedies include:

  • avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim;
  • an attachment or other provisional remedy against the asset transferred or other property of the transferee; and
  • an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property of the transferee or any other relief the circumstances may require. 740 ILCS 160/8.

The creditor with a judgment on a claim may levy execution on the asset that was transferred or the proceeds from that asset.  740 ILCS 160/8 (b).

3.      Bankruptcy Issues

According to Section 548 the bankruptcy estate trustee is authorized to avoid certain prior fraudulent transfers of the debtor which were made or incurred on or within one year before the date of the filing of the bankruptcy petition.  This one-year period was increased to two years by The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act increased the one-year period to two years for cases initiating more than one year after April 20, 2005.  11 USC §548(a)(1),(b).

The Bankruptcy Court may use the finding that the debtor has effected a fraudulent conveyance use to deny the debtor a discharge in Bankruptcy.   11 USC §727(a)(2)(A).  The problem of fraudulent transfers is they, generally, are based on a debtor’s inadvertent overly aggressive pre-bankruptcy “exemption planning”.

The trustee is able to avoid the debtor’s prepetition transfers of property as a fraudulent conveyance through use of the following:

  1. Transfers Avoidable. A transfer of an interest of the debtor in property within one year before the filing of the petition, or an obligation incurred by the debtor within one year before the filing of the petition, may be avoided as a fraudulent conveyance if one of the following tests is met:
  2. Tests
    1. Actual Fraud: A transfer made or obligation incurred with actual intent to hinder, delay, or defraud creditors.  11 U.S.C. §548(a)(1)(a).
    2. Constructive Fraud: The debtor received less than reasonably equivalent value in exchange for such transfer or obligation, and
      1. The debtor was insolvent or became insolvent as a result of the transfer or obligation;
      2. The debtor was engaged in business for which any remaining property was unreasonably small capital, or;
  • The debtor intended to incur debts that would be beyond the debtor’s ability to pay as they mature. 11 U.S.C. § 548(a)(1)(B).
  1. Self-Settled Trusts (Section 548(e). A transfer made within 10 years before the filing of the petition may be avoided, if –
    1. Such transfer was made to a self-settled trust or similar devise;
    2. Such transfer was by the debtor;
  • The debtor is the beneficiary of such trust or similar device; and
  1. The debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted. 11.U.S.C.§548(e).
  1. For purposes of constructive fraud, insolvency is measured using a balance sheet test, i.e. whether the sum of the debtor’s debts is greater that all of the debtor’s property at a fair valuation.  11 U.S.C.§101(32).
  2. The only party who may bring this action is the trustee or debtor in possession.  If a debtor-in-possession refuses to file a fraudulent transfer claim, the Court may authorize the Creditor’s Committee to bring the claim.  An individual creditor has no standing to bring a fraudulent transfer claim.
  3. Remedies
    1. Trustee may recover the property transferred or its value from the transferee or party for whose benefit it was made.
    2. A transferee that takes for value and in good faith has a lien to the extent the transferee gave value. 11 U.S.C.§ 550.

4.      Potential Criminal Issues

  1. Bankruptcy Crimes

The United States Code  provides the possibility of fines, imprisonment of not more than five years, or both, for any person who in connection with a bankruptcy case who;

  • knowingly and fraudulently conceals any property belonging to the estate of a debtor; 18 USC §152(1).
  • knowingly and fraudulently receives any material amount of property from a debtor after the filing of a bankruptcy case, with intent to defeat the provisions of the Bankruptcy Code; 18 USC §152(5). or
  • in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a bankruptcy case by or against the person or any other person or corporation, or with intent to defeat the provisions of the Bankruptcy Code, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation.  /Footnote/ 18 USC §152(7).

Richard M. Colombik, JD, CPA, is an award-winning attorney and CPA with a doctorate in jurisprudence with distinction and was formerly on the tax staff of one of the world’s wealthiest families.

Mr. Colombik has also been a tax manager at a Big Four accounting firm, the State Bar’s liaison to the Internal Revenue Service (IRS), vice president of the American Association of Attorney-CPAs, and vice chairman of the American Bar Association’s Tax Section of the General Practice Council, as well as the past chair of the Illinois State Bar Association’s Federal Tax Committee. Mr. Colombik has also served on the liaison committee to the Washington, DC, National Office of the IRS. Mr. Colombik is also a member of the Asset Protection Committee, American Bar Association, and a member of its captive insurance subcommittee.

Mr. Colombik has appeared on numerous television shows, hosted a weekly radio show on tax and business planning, and authored more than 100 articles on income taxation, asset protection planning, IRS defense, and estate planning. He has also instructed more than 100 seminars to professional groups, business groups, bar associations, CPA societies, and insurance groups. This is in addition to authoring a published work on business entity structures offered by the Illinois Institute of Continuing Legal Education, as well as writing a chapter for The Estate Planning Short Course and Asset Protection Planning.