In re Lawrence: The Trust Funded Two Months Before the Award

Anderson is the case critics cite first. In re Lawrence is the one they cite second, and it is arguably the worse set of facts. It is also the clearest illustration of what actually decides these cases.

In January 1991, anticipating an adverse arbitration ruling, Stephan Jay Lawrence settled an offshore trust holding an estimated $7 million. Two months later, a $20.4 million arbitration award was entered against him.

What Happened

Lawrence settled the trust in January 1991. The timing was not incidental: he was anticipating an adverse arbitration ruling, and the award - $20.4 million - was entered two months later. He retained the sole power to appoint the trust's trustees.

Amendments followed. A spendthrift clause. A duress clause instructing the trustee to disregard instructions given under legal compulsion. A provision declaring Lawrence himself an "excluded person" barred from benefiting from the trust. On paper, the structure was being hardened.

He filed for bankruptcy in 1997. The bankruptcy court applied Florida law rather than the Mauritius law the trust had chosen for itself, found the trust was property of the estate, and ordered Lawrence to turn over its assets. It then set a status conference a couple of months out to see whether he had complied.

He had not. At that conference the court found that Lawrence retained control - through his powers to remove and appoint trustees, and to add and exclude beneficiaries - rejected his impossibility defense, and held him in civil contempt. He was incarcerated and fined $10,000 per day until he purged it. The Eleventh Circuit affirmed.

Two Rules Broken, Not One

Most cited cases break one of the four rules that decide offshore trust litigation. Lawrence broke two, which is why the case reads so badly for him.

Rule 1, timing. A transfer made in anticipation of a claim is exposed to ordinary fraudulent-transfer law regardless of where the recipient sits. Two months before a $20.4 million award he saw coming is about as unfavorable a fact as this area of law produces. An offshore trust does not cure bad timing; nothing does.

Rule 2, control. Even setting the timing aside, Lawrence kept the sole power to appoint trustees and the power to add or exclude beneficiaries. That is not a technical defect. A settlor who can replace the trustee can, in practical terms, direct the trust - and a court asked to believe he is powerless will notice.

The amendments illustrate why paperwork does not substitute for divestiture. Lawrence added exactly the protective language the industry recommends, including the duress clause. The court was not looking at the clauses. It was looking at what he could still do.

What the Case Does Not Establish

The trust was never adjudicated as a properly formed offshore structure, because it plainly was not one. A settlor-controlled trust funded on the eve of a known award is a fraudulent transfer with an offshore address, and it is treated as such.

Notice also what the court did to obtain compliance: it jailed him and fined him daily. That is coercion applied to the person. As in the other contempt cases, the leverage ran against the debtor rather than against the corpus, which tells you something about what a U.S. court can and cannot reach directly.

What a Planner Takes From It

• Fund before a claim is foreseeable, not in anticipation of one. Timing is the single most common defect in the reported cases.
• Never retain trustee-appointment power. It is the most consequential power a settlor can keep, and it converts an offshore trust into an expensive self-settled one.
• Do not rely on clauses added later. Courts examine the settlor's powers, not the trust's adjectives.
• A duress clause protects the trustee's decision, not the settlor's liberty. Lawrence's trustee had cover; Lawrence went to jail.

For the full context - every circulating list of supposed offshore trust failures, reviewed decision by decision - see our review of offshore trust case law, and the Anderson case, which turns on the same retained-control fault line.