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ASSET PROTECTION AS A GOAL OF ALTERNATIVE
INVESTMENT
Anyone
with a reasonably substantial net worth may benefit
from offshore asset protection, and this financial management
strategy will be of particular interest to those working
in professions where there is a high risk of litigation,
for example doctors, lawyers, business owners, and financial
planners, to name but a few. There are increasing numbers
of lawsuits being brought (particularly in the US),
in which the defendant is being targeted not necessarily
because of his culpability in the case, but because
of his ability to pay. Individuals in the above high
risk groups with savings or significant assets could
well fall in this 'deep pocket' category, and risk losing
everything if there are not proper protection measures
in place.
An example.
Say a patient was prescribed drugs which could cause
drowsiness, was warned not to drive, but did and crashed
the car, causing serious injury to another party. Now
if the patient in question has substantial unprotected
wealth or good insurance, they will undoubtedly be the
ones sued by the injured party.
However,
if they either don't have any money or anything worth
taking, or they have, but have had the good sense to
protect it, or make recovering it an unattractive prospect,
guess who gets sued? That's right, the doctor, who despite
having warned his patient of the dangers, should have
known that he might have driven while under the influence
and cause serious injury, and therefore should not have
prescribed the drugs. In cases such as this, it isn't
about who is to blame, but who can pay the most, and
if your assets are obvious and easily reachable, you
are pretty much a sitting duck.
And it
isn't just doctors that are at risk from this type of
thing. Anyone in the professions mentioned above, or
simply anyone with substantial net worth, could find
themselves liable in a frivolous lawsuit or one which
has nothing to do with them.
Although
professionals of many kinds are obliged to have liability
insurance, this is becoming more and more expensive
due to the increase in litigation and the rising level
of damage awards - and in any case, may not cover the
full size of an award, particularly in the USA. Therefore,
it is increasingly important to consider putting in
place some additional asset protection measure.
Asset protection
strategies basically work by making the assets of an
individual unavailable, or difficult to recover, (and
hence potentially more unattractive) in the event of
legal proceedings being taken against them by employees,
clients, patients, litigious family members or other
creditors.
Protection
of assets can take a number of forms, and while there
are many domestic alternatives, including living trusts,
limited liability partnerships and companies, and family
limited partnerships, offshore vehicles are usually
more effective for this purpose. The trust is the lynch-pin
of offshore asset protection; although offshore bank
accounts on their own can provide enhanced privacy and
confidentiality, they are usually an integral part of
an asset protection strategy.
Banking
secrecy laws in offshore jurisdictions are usually significantly
stricter than domestic laws, unless criminal activity
or money laundering is suspected, although various initiatives
undertaken in recent years by the Financial Action Task
Force (FATF), Organisation for Economic Cooperation
and Development (OECD), and European Union (EU) have
combined to put something of a dent in banking secrecy
worldwide.
Banking
secrecy legislation varies from country to country,
so you will obviously have to check the situation in
your preferred jurisdiction before taking action. Lowtax.net
has extensive material on this subject - for each jurisdiction
see the sections on Law of Offshore and Forms of Company
in particular.
Offshore
trusts and companies can be used separately or together
for asset protection purposes (usually in conjunction
with an offshore bank account). In a trust arrangement,
the settlor (the person who transfers assets to the
trust) legally gives over control of his assets to a
trustee (or trustees), who manages and controls them
for the benefit of a beneficiary or beneficiaries (of
which the settlor can be one). Although the settlor
will usually provide a letter of wishes, detailing how
he would like the money to be managed, and distributed,
the trustee/s have legal control over the assets.
Although
trusts could once be used in order to 'break the link'
between an individual and his assets, this is less the
case in recent times, as high tax countries have had
time to develop legislation forcing at least some degree
of transparency onto trust arrangements. However, recent
legislative developments in many offshore jurisdictions
have significantly improved on the original English
trust law model, providing effective defences against
forced heirship provisions, and in many cases, imposing
a time limit on creditors' claims. Many offshore jurisdictions,
like some US states, also now have 'spendthrift' trust
legislation under which trustees can disregard requests
by or on behalf of a settlor.
If an individual
sets up a bare offshore company (usually an International
Business Company or IBC) to hold his assets, he will
normally be a shareholder in that company and vulnerable
to Court action. However, in many offshore jurisdictions,
the lawyer establishing an IBC (or indeed a trust) on
behalf of an individual is not obliged to name the eventual
beneficiary, and for this reason, an offshore company
can still go a long way towards providing privacy and
asset protection - after all, your creditors first have
to find your company before they can sue it. The flaw
in this line of reasoning is that you are obliged to
disclose the existence of such assets to the tax authority,
and once it's on your tax return, the whole world knows
about it. Plenty of pressure has also been exerted on
offshore jurisdictions to put in place 'know-your-customer'
and mandatory registration rules. So the trust survives,
and even prospers as the instrument of choice for asset
protection in many cases.
In order
to ensure effective offshore asset protection, then,
you need to establish the structure in a jurisdiction
with effective IBC privacy legislation, strong banking
secrecy laws, and modern trust legislation. For a detailed
examination of these, and other aspects of protecting
your assets and doing business in over 30 offshore jurisdictions,
visit the Lowtax
Jurisdictions Guide.
Asset protection
however is not something that should be attempted when
legal proceedings are imminent, or already underway,
as any attempt to transfer assets under these circumstances
would be considered a fraudulent transfer, which is
illegal, and would provide no protection against creditors
whatsoever. However, a well-structured asset protection
strategy, set in place ahead of time could prove a very
effective tool in protecting both wealth and privacy.
NB: This
information is provided as general guidance; anyone
considering setting up an offshore company or trust
should of course take appropriate professional advice.
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