Offshore Asset Protection For United States Clients

Article by Leslie C. Giordani and Elizabeth M. Schurig Background The explosive litigation industry in the United States, capricious legislative bodies, and the volatility of financial markets and economies have evoked a powerful response. The buzz word among lawyers representing clients at risk is "asset protection." More than at any time in our legal history, attorneys are scrambling to find ways to protect and preserve the wealth of their clients. High net worth individuals perceive new and potentially devastating threats to their wealth, and creative lawyers must conceive and render more protective solutions. Traditional asset protection ranges from simplistic homestead and retirement account planning to family limited partnerships. Cutting edge approaches dictate the use of more sophisticated vehicles such as offshore trusts.

Legal Threats Threats to individual wealth from litigation arise across the spectrum of contract and tort law. The plaintiff's bar in the United States has been marvelously creative in its practice over the past decade. It has contrived new theories of liability in the malpractice, products liability, contract, securities, ultra vires, and employment areas and judges have accepted many such theories. The measures of damages (compensatory, punitive, and exemplary) for psychological, emotional, and other highly subjective injuries have also expanded tremendously.

Some causes of action stem from legitimate and expected contract creditors, such as those occasioned by consumer and bank debt or the breach of an obligation to perform. Less easily anticipated claims arise from guaranties, contingent liabilities, and joint and several partnership obligations. Debtors often can be surprised by the extent of this exposure and the reaches of creditors. For example, unexpected risks can derive from the financial failure of a partner or business associate, the judicial interpretation of a guaranty beyond its intended scope, or simply from the size and amount of damages awarded in business litigation judgments.

The extension of corporate liability to officers and directors also results in unpleasant surprises and economic losses. Shareholders, governmental entities, and business associates have successfully sued under theories of liability that render the corporate veil of limited usefulness. While perhaps justified, the government's success in achieving personal liability judgments against former officers and directors of failed financial institutions dramatically exemplifies this trend.

Beyond the contract creditor and business claimant is the tort creditor. Numerous publications describe the unrestrained growth in tort litigation. Media headlines continuously report new theories of liability and astronomical damage awards. The United States enjoys the dubious reputation as the world's most litigious society, and the prospects of meaningful tort reform appear bleak. Even with the Republican majority in Congress, tort reform legislation is currently limited in scope and halting in progress.

While liability insurance once provided the trusted shield from potential economic devastation resulting from a civil judgment, individuals with "deep pockets" are increasingly susceptible, irrespective of their insurance coverage. The escalating cost of premiums, the unavailability of coverage for some risks, and the routine denial of coverage by some insurance companies detract from the utility of traditional insurance.

In addition to the potentially disastrous effect of tort, contract, and business liability, there is increasing concern about what might be called regulatory (or legislative) liability, evidenced in recent years primarily in the form of the United States environmental statutes. Landowners, whether individuals or businesses, may be liable under federal law (e.g., CERCLA, the Comprehensive Environmental Response, Compensation and Liability Act1) or state law for environmental hazards on land that they own. This liability can apply regardless of whether present owners created the hazard or whether they acquired the land with knowledge of the hazard. Furthermore, liability can be imposed under such laws on former landowners or, in the instance of corporate landowners, on directors or shareholders if they had substantial "control" over the land.2

Business owners perceive other legislative liabilities in the form of the Americans with Disabilities Act3 and the Family Medical Leave Act.4 While motivated by praiseworthy aspirations, these acts have an economic impact on business and create additional causes of action.

Another contemporary concern in the area of claims on wealth comes from the divorce court, not because divorce claims are new, but because they are so prevalent. Judges and legislators are understandably anxious to protect a nonworking spouse, but even carefully planned premarital arrangements (with both spouses represented by counsel) often fail to withstand judicial scrutiny. Moreover, the evolution of interspousal tort liability claims (e.g., intentional infliction of emotional distress) in some cases effectively renders premarital agreements meaningless.5 Lawyers find planning in this area very challenging, and concern is not necessarily limited to the client or even the actions of the client's spouse, but often includes concern for children whose inheritance the client wishes to protect from loss upon divorce.

Compulsory dispositions, whether inter vivos or testamentary, present a more familiar asset protection problem. However, our highly mobile society and the related fact that clients increasingly have assets in more than one jurisdiction have generated a new awareness of this issue. Most civil and common law jurisdictions have statutory provisions for forced dispositions at death or upon the termination of marriage. Common law legal systems recognize dower and curtesy rights, and civil law systems usually incorporate forced heirship concepts. In community property states, these battle lines are drawn along the character of the property, that is, the determination of whether it is separate or community property. Movement by a married couple from one jurisdiction to another complicates the nature of property and marital rights as well as rights of heirs and legatees. Today, clients seek to insure that property passes to the intended beneficiary rather than to a claimant under these various theories.

Many wealthy individuals view the United States legal system as facilitating the capricious redistribution of wealth. At a minimum, its judicial and legislative branches operate unpredictably and can have dramatic economic consequences to an individual's net worth.

Economic Threats The preceding section examined contemporary legal threats to wealth. In a different, but in a no less modern or serious vein, exist what might be classified as economic threats. Despite its current strength, concerns about the United States economy remain. Troubling issues include weaknesses in the social security and health care systems, the interest on the federal debt, and the United States government's propensity, albeit high-minded, for throwing money at a current crisis, whether national defense (e.g., the Gulf War) or internal calamity (e.g., the Mississippi River floods of 1993 and annual hurricane disaster relief). In addition, despite reform efforts, the foreign trade imbalance also continues to haunt the economy.6

The historical performance of certain foreign currencies, notably the Swiss franc, suggests that long-term investments denominated in such currencies are prudent. During the 1970's, for example, the Swiss franc appreciated against almost every major currency in the world.7

Prominent investment strategists believe that meeting the primary goal of investment, high return with acceptable risk, requires international investment. By mixing foreign and domestic investments, United States investors achieve superior diversification, thereby lowering risk. Consequently, reputable investment strategists are recommending that such investors place anywhere from 20 percent to 30 percent of their equity investments in foreign stocks.

A significant segment of the United States investment advisor community foresees economic threats to wealth and encourages foreign diversification. The existing risks would be exacerbated by potential foreign exchange controls or related legislation. Early planning potentially allows an investor to achieve diversification and minimize the consequences of possible currency devaluations.

Political Threats Citizens of countries in Latin America and the Middle East have a long history of using asset-protective planning to deal with revolution, governmental expropriation, and other attacks on private wealth occasioned by unstable governments or civil unrest. While such political extremes are certainly less likely to occur in the United States, concern about the domestic economy and its tax structure has caused individuals to consider expatriation (or perhaps repatriation, for foreigners living in this country).

There has been a sharp increase in clients seeking expatriation advice. Anecdotal reports among lawyers in this field suggest that citizens increasingly are discouraged about the United States' inability to solve its domestic problems, the readiness with which Congress adopts a "tax-the-rich" approach, and the confiscatory nature of the wealth transfer tax system. Business owners express frustration at the cost of operating in a litigation-prone society with a government that is antagonistic to their needs. Congress, concerned about the economic impact of this trend, has tightened the tax rules governing tax motivated expatriates and has recently passed an immigration law prohibiting re-entry by such expatriates into the United States.8

While...