By Jeffrey H. Corbett
Reaching epidemic proportions, statistics now show that US citizens have a one in four chance of being sued during their lifetime. While this article looks at the challenge of asset protection from a United States perspective, successful individuals are being targeted in any number of jurisdictions. Business owners and professionals are the most likely to be sued; also included in that grouping are physicians, plastic surgeons, stockbrokers, law enforcement officials and real estate developers. Governing rules of civil procedures have been liberalized; consequentially legislators have made the process of taking legal action much easier than ever before. Results can be devastating, and products such as liability insurance are rarely enough to cover all eventualities. Traditional approaches to asset protection, such as utilizing a corporate veil to limit shareholder liability, are likewise seldom good enough. For instance, most liability insurance policies do not cover some of the most common reasons for civil litigation. Frequently excluded are: sexual harassment, wrongful termination, negligence or any type of punitive damages. In addition, policy limits are often severely under the multimillion dollar judgments being handed down. As a result, the use of offshore vehicles has been brought to the forefront of asset protection and financial planning.
Not too long ago a fascinating piece of writing appeared in Forbes Magazine with the premise being that litigation is actually a much greater threat to American wealth than taxes. According to the article, this is due to American citizens being exposed to an infinite amount of liability through an overworked system of litigation. Thus, high-net worth individuals are putting “unlimited assets” at risk. This article goes on to state that “contrary to the popular vision of offshore banking, the true purpose of offshore accounts and corporate structures for many wealthy clients is to protect a lifetime of earnings and savings not from being taxed, but from being wiped out in a major lawsuit–say, a medical malpractice or a class-action securities litigation against an executive.”
Often, the measure of an attorney’s skill is their ability to construct a theory of liability, which will connect a remote and seemingly innocent deep pocket to a particular case. Consequently, an individual’s innocence has little to do with whether or not they will be targeted. Early on and during the normal course of business, an attorney will do a financial investigation directed at the potential target of the litigation. Information that you might rightfully consider confidential can easily be found during this discovery period. To that end, numerous investigative services are in the litigator’s toolkit. For a nominal investment your future adversary will have obtained a profile of your financial wellbeing. This comprehensive sketch will likely include: your bank accounts, brokerage accounts, property ownership, collectibles, credit rating, business holdings, etc.
Working on behalf of their plaintiff, most attorneys file civil judgments on a contingency basis. For that reason, these lawyers will only get paid if they can get a settlement or win the suit. As such, they are not interested in pursuing “judgment proof” defendants. Regarding asset protection, therefore, the old saying still rings true … “an ounce of prevention is worth a pound of cure”. The key is to lower your discoverable financial profile ahead of time or to place expensive and time consuming hurdles in the path of frivolous filings.
US civil litigation is not readily recognized in many overseas locations which makes moving your assets offshore a strong strategy. Accordingly, by transferring a portion of your assets offshore to a privately held offshore entity, you have effectively made yourself a much smaller target. These steps may in actual fact place your assets well out of harms way.
In the rare event a plaintiff should wish to follow you offshore, they may find it a very expensive and distasteful experience. For example, the plaintiff would first need to know where the assets are being held. Then they would need to retain local attorney within that specific country. This would be at considerable expense inasmuch pro-business jurisdictions tend to have an absence of barristers willing to work on a contingency fee. Also, since frivolous lawsuits are not looked upon favorably, it would be incumbent upon that attorney to convince a local court to hear the case. Even if that can be accomplished, the case will likely be dismissed should it be proven that assets were transferred prior to the suit being filed. The wicked battle awaiting a plaintiff offshore often results in either a settlement on the defendant’s terms or the suit being dropped all together. We call that a win!
The best and safest time to create an asset protection strategy is before there are any potential creditors. If you wait until a lawsuit is pending there is a substantial risk that a court will find any transfer of assets an attempt to defraud. At that point there are serious consequences. A perceived attempt to defraud a creditor would likely result in the setting aside of any transfer. Important side note: please keep in mind that you will likely still have tax obligations from your country of citizenship. For the most part, offshore planning has become a “tax neutral” event. This is especially true as we have seen an increase in jurisdictions moving to the world income tax model.
The occurrence of frivolous lawsuits is at an all time high and most likely will only continue to grow. Now more than ever, it is essential to protect your assets from the risk of being wiped out in a potential lawsuit. As litigation is at this time considered a greater threat to wealth than taxes, it is your responsibility to protect yourself. No one else will. For nearly two decades, the use of offshore vehicles has become a significant aspect of modern estate planning tactics for wealthy individuals and their families. Done legally and ethically, transferring your assets to an offshore entity has the ability to dramatically “tip the scales” in your favor.