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.