SALTING IT AWAY IN MARGARITAVILLE
Few people can even find the Cook Islands--a group of 15 volcanic specks 1,600 miles off the coast of New Zealand--on the map. But over the past decade, the Cooks--along with equally minuscule jurisdictions such as Belize, Gibraltar, and the Cayman Islands--have emerged as Meccas for millionaires looking for offshore trusts to shield their wealth from people who want a piece of it, including creditors and angry ex-spouses. All of these tiny nations have passed laws making it nearly impossible for claimants to collect.
Now, interest in the far-flung offshore trusts is exploding. Once limited to the ultrarich, these days they're hawked in personal-finance magazines and on the Internet to people whose net worth is under $1 million. Denver attorney Barry S. Engel, who co-authored the Cook Islands trust law in 1989, says his firm has by now helped Americans transfer $5 billion to $7 billion offshore. In all, experts suggest, rich Americans have funneled hundreds of billions into these trusts. ''Being successful makes you a target in our country,'' claims Engel, who says an offshore trust is akin to ''taking out a fire-insurance policy'' against a legal system run amok.
Maybe so, but this ''insurance'' is also generating more and more controversy. Offshore trusts are ''hideous scams'' that allow ''the wealthy to say, 'I don't have to abide by the rules that apply to everyone else,''' says Harvard Law School professor Elizabeth Warren. She and other legal experts have begun calling on lawmakers to rein in the trusts.
For now, offshore trusts can be a highly effective method of shielding assets. Consider the ongoing divorce battle between Swiss industrialist Donald Hess and his American wife, Joanna. Just two months before filing for divorce in New Mexico, Donald allegedly transferred 92% of the stock in Hess Holdings--estimated to be worth over $200 million--to an offshore trust in Gibraltar. Although Joanna has spent $600,000 in legal fees, she has failed in several attempts to assert a claim on the assets.
The reason creditors like Joanna have a hard time is that most offshore jurisdictions don't recognize foreign judgments. Moreover, they face the expensive proposition of retrying the case where the trust is based. Creditors also often confront very short statutes of limitations for proving fraud--and usually must pay all court costs if they lose. In the Hess case, the Gibraltar Supreme Court in March refused to even hear Joanna's claim that Donald's trust was an effort to defraud her. While she is now pursuing her claims in New Mexico, Donald is standing firm. He maintains that the trust was established solely to avoid estate taxes in the U.S. and Britain.
The ironclad protection doesn't come cheap. Engel charges a flat fee of $18,500 to set up a trust, and annual ongoing management fees run into the thousands. Almost any type of assets can be placed in the trusts, including cash, stocks, title to real estate, even copyrights. Moving money offshore also entails some big risks. There's less protection against fraud overseas and no guarantee that political or legal changes won't render the trust worthless.
KEY DECISION. Now a series of recent court rulings suggests the tide may be starting to turn against offshore trusts. In the latest, on July 1, a New York judge struck what could prove to be a landmark blow against the use of such trusts in a divorce. The case involves Roger Riechers, a New York area urologist who moved $4 million to an offshore trust set up in the Cooks by Engel's firm. In 1994, his wife Mary filed for divorce. Although Riechers argues he was simply trying to protect himself from potential malpractice claims, the judge nonetheless ruled that the $4 million was ''marital property'' and that Mary deserves half.
While courts in the Cooks may not honor this judgment, the New York court could force him to return the assets by citing him for contempt. ''This is a terribly important case,'' says Harvard's Warren. It will take more cases for the backlash to build, she adds. But if it does, the Cooks and other offshore havens may lose some of their newfound allure.
By William C. Symonds in Boston
Updated July 23, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.