Asset Protection: A Necessary Response to “Out of Control” Litigation

In today’s society litigation is often used a means for the accumulation of wealth — not only for greedy plaintiffs, but for their unscrupulous lawyers as well. The proliferation of all types of liability claims and new theories of liability, coupled with ever-increasing insurance premiums and defense costs have stunned the business and professional community in the United States.

Conscience-shocking jury awards are being granted under old and new theories of liability, to the point where many businesses simply cannot afford to continue on. This type of loss has a “ripple” effect, resulting in increased insurance costs (if the defendant was fortunate enough to have coverage with a solvent insurer), which are eventually passed along to the public in the form of higher prices for goods and services. Moreover, if punitive damages are awarded, even a solvent insurance company won’t help – punitive damages generally aren’t covered by insurance.

What’s left for the businessperson or professional who would like to continue in business or practice his or her profession – and be able to sleep at night without the fear of a financial catastrophe? What can the wealthy individual, seeking a bullet-proof pre-nuptial arrangement do? What’s left for the retiring professional faced with staggering tail premiums, providing, in many cases, totally inadequate coverage?

Seeking to protect oneself from potential creditors is nothing new. Traditional methods have typically involved outright transfers to a spouse or other family members, creation of irrevocable trusts, and secret “asset return” arrangements. The effectiveness of these methods in protecting assets is questionable, and the use of each creates its own set of problems, which include: fraudulent conveyance issues, exposure of the property to the transferee’s creditors, gift tax issues, and most importantly, loss of income and control. A properly structured domestic trust may solve some of these problems, but where the client-transferor retains “strings” over the transferred property, the asset protection is nullified. Those who wish to use a domestic trust to protect their assets must sever all ties to the trust, and be prepared to accept the resulting loss of income and control, and to address the resulting gift tax issues. None of the traditional methods mentioned seem to provide a solution to the asset protection dilemma. What is the answer?

The answer is: to adopt advance planning strategies which place assets beyond the reach of potential future creditors. By utilizing sophisticated estate and business planning techniques — none of which are new — a businessperson, professional, entrepreneur, or other target individual can effectively protect his or her assets from future creditors and at the same time enjoy the benefits from the assets and their income. This type of planning involves the combined use of an international asset protection trust. Importantly, it is not based upon secrecy or violating the fraudulent conveyance rules, nor does it result in gift tax problems.

We’ll discuss more on this next time.

 

August 21, 2012

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