We now have lawsuits being filed at the rate of one hundred
million cases a year. Many of these suits have nothing to do
with right and wrong, but instead, are predicated on the desire
of one party to extract wealth from another party. In many
cases, this equation is not predicated on the desire to extract
real wealth instead, but on a desire to extract small payments as
"nuisance" settlements because it is cheaper to pay than to
fight.
If lawsuits continue at the pace they do today, each person
in the 80% of wage earners in this country will ultimately be
sued five times. One does not have to lose even one of these
cases in order to lose their wealth; simply the cost of
litigating these issues can be onerous enough. If we assume that
one is lucky enough to make it through the legal maze without
becoming a target, then at time of death the federal government
under today's law would take roughly 50% of a family's wealth as
the transfer is made from mother and father to children of all
amounts over $1.2 million. Several bills have proposed even more
onerous taxation.
If you have attempted to pursue the American dream of
wealth, of independence, have the ability to control your life,
you may very well be disappointed by these numbers. In fact, you
may be frightened.
For many people the threshold issue in asset protection is:
do I need it? Many people believe "this won't happen to me, it
can't happen to my business, my family is safe, because we don't
anything that's dangerous." The reality of life in America is
that you don't have to do anything dangerous; all you really have
to do is be in the wrong place at the wrong time. Ordinary
people have extraordinary problems. In many cases these problems
are not problems of their own doing, they were simply matters of
circumstance.
Imagine a group of business partners getting together for an
informal lunch to discuss their work, one of the secretarial
staff in the office is asked to go to a local restaurant and pick
up an order for these partners. Unbeknownst to the partners as
part of her normal work environment, this party has a poor
driving record, several accidents and speeding are the main cause
of these problems. The secretary leaves the building, climbs
into their car, and proceeds to pick up lunch. In the midst of
this trip excessive speed is taken by the employee. The employee
pays more attention to the radio than to an upcoming stop sign.
The stop sign is run, a car is smashed, a life is lost. A
subsequent lawsuit, one would think, would simply blame the
employee for her negligence, but unfortunately this is not the
case.
All of the partners are sued as the result of their
negligence in not determining that this driver was in fact
unsafe. More importantly, this driver was on company business,
and the heirs of the life that was lost now seek retribution from
the remaining partners. Their homes, their college funds, their
boats, their vacation homes, even their business are up for
grabs.
In a subsequent lawsuit, several hundred thousand dollars
are spent attempting to defend this suit. Unfortunately, this
case is not settled because the main suing party, one of the
remaining family, continues to expect more money to be found,
more wealth to be uncovered. In many cases one of the prime
financial elements that is being sought is insurance. In days
gone by, insurance was a protector of the family and the
business. Nowadays it often acts as a target.
A man working for himself acquiring properties, managing
them, providing housing for many people, finds himself the
subject of a lawsuit. The lawsuit is brought by what are known
as squatters. Persons who have entered property that is vacant,
set up households, and are living rent free in houses with no
electricity, no water, none of the creature comforts most of us
would require in real estate. These persons actually constitute
a family and have small children. These small children eat the
paint coming off the walls in this property, they suffer damage.
This squatting family now brings suit against the home owner, and
he must defend himself in court against this squatter suit. How
unfair can it be for someone to enter your property without your
knowledge and without your permission, do damage to their
children through their own negligence, and turn around and
attempt to sue you. To what degree can the system be unfair.
These are simply examples of what we call extraordinary
problems for ordinary people. The days are gone when simply the
rich and powerful are the subject of lawsuit. The days are gone
when right or wrong truly become the litmus test by which a suit
is either filed or dismissed. It is imperative that families and
businesses today understand that they are at risk and that
problems can ensue.
Only Comprehensive Planning Will Succeed
There are several options that people are faced with in
providing an asset protection plan. Some of them are good, some
of them are not.
One of the unfortunate options that people many times opt
for is to lie and to misrepresent. Let it be known without any
doubt that plans of this nature simply will not work. It will
not work for many reasons. First, the question of telling
untruths in a court action is obviously one that can have severe
ramifications. People go to jail for perjury, fines are imposed,
careers are ruined. It is absolutely critical to understanding
the way asset protection works for people to understand that they
must be compelled to tell the truth to the court, and only by
telling the truth can they succeed.
It is critical to understand that by being truthful and by
not making your plan vulnerable, you serve your business, you
serve your family, you serve all parties involved with a truthful
and bullet proof arrangement.
It is also true that in a comprehensive plan the protection
that is given to a well thought out devised plan comes from the
fact that other benefits are garnered. This is the unique and
ironic point, for when you consider the fact that the way to
protect is to avail yourself of other benefits available under
law which in effect becomes simply saving money and creating
predictability and safety in your life. Then the downside to
such actions does not look severe, in fact it looks highly
attractive.
One must imagine how disappointing it must be for a doctor
to take the base of his wealth and in fear of lawsuit for the
entire asset base of this position to be transferred to a wife
and to children, and ultimately for this transaction to be
unwound because the court examines this transfer and detects
badges of fraud.
Now in this particular case, this sort of planning has been
done for years and years by physicians of all sorts.
Unfortunately the plan is not comprehensive. It does not supply
these other benefits, it does not supply the kind of reasoning
that the court wants to see in judging this plan as a non-
fraudulent transfer.
In many cases, those persons that have fraudulently
transferred are normal everyday business people, lawyers,
accountants, those people who you would think would be aware of
this. Most lawyers are painfully unaware of how asset protection
works. Almost all accountants are, as well as financial planners
and other trained financial practitioners.
The answer to this problem is relatively simple. If one
were to have an appendectomy, one would desire a trained
professional. When something as simple as a tune up on a car is
done, most people turn to a professional. When tax forms are
filed the average citizen retains the services of a trained
professional. There is no difference philosophically speaking in
these endeavors and the formation of an asset protection plan.
Now, the problem with this equation is that one will immediately
assume that the place to go to find professional help is in an
attorney's office, and in many cases this is absolutely not true.
Trained professionals in asset protection can come from many
different areas. They can come from the accounting field, they
can come from the investment advisory field, they can come from
the life insurance field, they can come from the legal field.
However, it is absolutely clear that most people need a
comprehensive plan. This requires the practitioner to be
educated in areas of accounting, of investment, of legal matters,
of bankruptcy, of many different areas which are simply beyond
the average attorney.
There are many people today who are promoting themselves as
asset protection experts and yet what they do is to provide a
simple type of solution to a very complex problem. For example,
there are numerous seminars around the country promoting the use
of family limited partnerships. Family limited partnerships are
an excellent, excellent, tool for asset protection. However, if
used in a vacuum, and if used in a strictly particular sense,
this plan can fail, and in many cases does, due to the inability
of a court to look at this transaction and not label it a sham.
Unfortunately this will come at the worst possible time for
the person attempting to protect their assets and will result in
forfeiture or confiscation. Attorneys are certainly adept at the
drafting of these plans but a more well rounded organization is
necessary for the proper implementation of such plans.
A decade or two ago, tax haven countries were used primarily
by wealthy families setting up trusts for the grandchildren. As
tax laws have changed, such simple solutions are generally no
longer possible.
But today the same countries are being used, with the same
trust and corporate forms, to provide asset protection. The tax
neutrality of the tax haven countries is ideal for this purpose,
since there is no additional tax complication for the person
seeking asset protection. Thus the tax haven business has slowly
evolved into the asset protection business.
Yet the truth is that wealthy families have had asset
protection for decades using tested and perfected structures in
stable jurisdictions such as Delaware and Switzerland. As asset
protection has become something of a fad (it wasn't called "asset
protection" back then), a lot of people are jumping on the latest
gimmick promotion to come out of a distant sandbar with two palm
trees, a secrecy law, and an American lawyer to hype it as the
latest thing in asset protection.
It might work -- but then again it might not. Since the
asset protection business hasn't developed as a part of the
social fabric of the particular sandbar, the population and the
local government really don't care if it works or not. The
registration fees for trusts and corporations will enrich the
country's treasury meanwhile, and schemes that fail tend to get
little publicity.
It is far preferable to stay with jurisdictions where the
asset protection features have evolved as a fundamental part of
the law and the local social and political structure.
About the Author
Adam Starchild is the author of over a dozen books, and
hundreds of magazine articles, primarily on business and finance.
His articles have a appeared in a wide range of publications
around the world -- including Business Credit, Euromoney,
Finance, The Financial Planner, International Living, Offshore
Financial Review, Reason, Tax Planning International, Trusts &
Estates, and many more.
More information on asset protection can be found at
Asset Protection & Becoming Judgment
Proof.
Copyright © 1995 by Adam Starchild
The Libertarian Library has reprinted this article with the permission of the author.
