How to: Protect Your Assets
Most of my clients are entrepreneurs who often risk huge amounts of capital and effort on new ventures. Naturally, when these become profitable there is a desire to extract money from a high-risk environment (the trading company) to a lower-risk environment (the shareholder’s personal bank account). This extraction of cash is the first step in asset protection. Low risk does not mean no risk. Cash or assets held in the name of an individual are always vulnerable in the event that the owner faces some kind of threat. Threats can come from all sorts of directions — for instance, legal claims from creditors, divorcing spouses, disgruntled business partners or, in the worst case, the client could be on the wrong end of bankruptcy proceedings. If this happens, then all of the client’s assets are exposed and could be seized in order to meet that claim. Indeed, one of the first things a potential claimant will do before launching legal proceedings is to assess the financial substance of the potential defendant. Where that person is a ‘man of straw’ (which is what we lawyers like to call people with no assets), then there is no point making a claim in the first place as the chances of recovering any money will be negligible.
This is why some of my wealthiest clients actually have no assets in their name at all and everything is wrapped up in trusts, foundations, or offshore companies, and/or given away to spouses or family members, thereby making it very difficult for a potential claimant to (a) understand what the individual is actually worth and (b) recover any money in the event that a claim is successful. We all understand that prevention is better than cure so the act of legally distancing yourself from your assets, while still enjoying them, is the best way of preventing legal problems later on.
You may be wondering how it is possible to enjoy assets while not actually owning them — surely what is given away is gone? This might be true in respect of outright gifts of cash to family members since the recipient may spend that money and, once spent, it is indeed gone forever. However, for other kinds of assets the position is more nuanced. For instance, it is very common for entrepreneurs to make sure that the family home is in the name of their spouse, and sometimes it is possible to include the children as well on the property title. However, when it comes to financial assets like shares in the trading company or a portfolio of investments then issues of control become more important. In my experience, clients generally will not want to give away control of their companies or their portfolio assets to inexperienced (or possibly untrustworthy) family members. In this scenario, we need to introduce the concept of a trust or foundation to hold those assets.
With a trust the legal title to the assets is given to the trustee, who will hold those assets for the benefit of the settlor (the person who funded the trust) and their family. This arrangement gives us the legal separation of ownership and control needed for asset protection. Sometimes this is enough to completely protect the asset in question and at other times more action is needed. This is when we start considering offshore trusts — that is, a trust that is not based in the same jurisdiction as the client. Some jurisdictions (like most EU countries) do not recognize trusts, meaning that if you want a trust you are forced to consider an offshore jurisdiction. It is for this reason that countries such as Jersey and Guernsey have been such popular centers for trust administration.
There is no point building up wealth if you are not going to take the necessary steps to protect it. History is littered with cases of fortunes made and lost. With some prudent action taken early on, you can sit back, relax, and enjoy your wealth