Law-abiding people of means who want to manage their risks and protect their assets typically consult an asset-protection planner for assistance. This is generally an attorney or a financial expert. The aim is to establish a plan that avoids risks altogether, or, if risks materialize, to contain and manage those risks and settle disputes quickly. It seems a logical thing to do—if you have a lot of money, you want to keep it. So why, then, is this type of asset protection often perceived as sleazy by many people, including judges and juries?
If creditors are legitimate, that is, are legally entitled to money from the owner of assets, the creditors can suffer when asset protection methods are used. Asset protection plans generally do not make distinctions between good or just creditors and bad or unjust creditors. Nor do they anticipate that if the protected client does something wrong, he will do the right thing to remedy the situation. Too often, such plans are used to shield money that is rightfully owed.
Although the offshore trust market has been cleaned up in the past few years (see Using Foreign Trusts and Offshore Entities to Protect Your Assets), the impression persists that the industry is riddled with drug traffickers, money launderers, fraudsters and tax evaders. If an asset protection plan utilizes an offshore component, then, in the minds of many, there is the taint of sleaze in the plan.
Asset protection is often seen as an issue of morality rather than legality. There are no clear lines between what is permissible and what is not. Judges and juries are influenced to some extent by moral considerations beyond the confines of the law when determining whether or not to allow a particular asset protection structure to protect assets from a particular creditor. The question of whether a transfer of assets was fraudulent or not is more often a question of fact.
The following example illustrates:
Suppose a stockbroker persuades an investor (Investor) to purchase a particular investment, but the investment doesn’t pay off as Investor had hoped. Investor sues stockbroker. Should stockbroker’s asset protection structure be allowed to protect his personal assets from a judgment against him? That will depend on the facts. What if the investment was part of a scheme with no economic substance, a so-called “Ponzi scheme” and stockbroker tells Investor that it is legitimate when stockbroker knows it is not. The judge may employ some extreme remedies to get the money back to compensate Investor.
But suppose stockbroker analyzes a company in good faith and tells Investor it will go up by 50% and it goes down by 50% instead. There is no element of fraud, so, depending on other facts, there is a better chance that stockbrokers’ personal assets will remain protected even if Investor wins a judgment against stockbroker. As you can see, there are no hard and fast rules.