Trust Estate

GUEST ARTICLE: "Golden Principles" Of Asset Protection In Times Of Trouble

Donna Goldsworthy Irwin Mitchell Commercial Litigation Partner 14 March 2016


Asset protection is, or ought to be, a core subject for wealth management professionals to understand and master. Whether due to threats to privacy, potential court battles or succession fights, there are principles that need to be embraced.

Asset protection is a term that can mean a number of strategies, tactics and methods. Much will depend on the jurisdiction, level of wealth, age of a person and their relationships. For example, what happens in the case of freezing of assets and a subsequent court battle? How should one treat social media in terms of privacy around wealth and other issues? In this article, Donna Goldsworthy, of UK-headquartered law firm Irwin Mitchell, delves into the details. As ever, the editors here welcome readers’ responses. 

Below are some useful tips and techniques to ensure your asset protection plans remain effective in the good times and the bad.

Many people first consider asset protection planning when a threat or risk arises that throws the safety of their assets into doubt.

Asset protection planning is most effective when employed pre-emptively, before the creditors loom, allowing you to properly and legally safeguard your most valuable assets. 

1. Forewarned is forearmed 

- Protection put in place before a claim or liability arises is far more likely to hold strong than something put in place afterwards;   
- Your actions may be unravelled if it is proved that you deliberately dissipated assets where you are already aware of a claim or a creditor’s intention; 
- To mitigate this risk, assets should be reviewed following genuine advice prior to any claims being served, to avoid any suggestions of impropriety.

2. Fail to plan, plan to fail 

- It is possible that putting asset protection mechanisms in place after a claim arises can potentially expose you to additional problems;  
- If the court believes that assets have been wrongfully kept out of the reach of a creditor they will employ equitable rules of tracing to retrieve those assets for the benefit of the creditor; 
- However, it may be the case that the court additionally finds you have acted dishonestly and/or in breach of your obligations to the creditor; 
- There may be further costs consequences as a result, making an unfavourable judgment an expensive mistake.

3. Pick the right vehicle for you

- The concept of a separate corporate identity, where the company, as separate from the individual (who is usually shareholder), is the legal owner of the asset, has increasingly been used by individuals as a method of separating themselves from the legal ownership of the asset whilst in reality maintaining control; 
- The courts will, however, be suspicious of an individual using what is intended to be a commercial structure as a personal tax haven or slush fund. Where they establish impropriety or an attempt to conceal liability, the court is prepared to look beyond this principle of separate corporate identity and retrieve the asset in favour of the individual’s creditor;   
- Trusts, however, are by design intended to protect personal assets, and they will be respected by the courts where properly set up. Assets are therefore likely to be better protected in a trust than they will be in a purpose-built company structure. This will put enough distance between the individual and the asset, and will lessen the likelihood of a creditor successfully claiming that the mechanism should be disregarded on the basis it is merely a puppet of the individual. 

4. Overseas assets

- When putting an asset protection plan in place it is important to remember that assets outside the jurisdiction will not necessarily be safe from creditors in the UK; 
- Where a creditor has brought a claim against you the court may grant a worldwide freezing order preventing you from dissipating your assets pending the outcome of the claim if the creditor successfully argues there is risk of you dissipating your assets; 
- A freezing order is serious business, and failure to comply with the order may result in imprisonment for contempt of court. The late Scot Young was imprisoned for contempt of court during his infamous divorce battle for failing to provide information regarding his true worth. 

5. Transparency is key

- As Warren Buffett once infamously said, "it is only once the tide goes out that you know who is not wearing a bathing suit". When putting asset protection plans in place it is vital to consider how the structure will look "once the tide goes out" and it faces scrutiny from the tax inspector at HMRC or the courts; 
- An asset protection mechanism predicated on the basis of secrecy will only cause problems in the event of such an investigation; 
- Failure to disclose details in these circumstances will often constitute a fraud, and in a complex structure will involve a number of individuals - such as family members or employees - with knowledge of the protection tactics employed; 
- An asset protection plan is intended to give peace of mind and security. In order to do this it must at its very core by conducted to the letter of the law, or else it is destined to fail.  

6. Bankruptcy is rarely the solution

- Once the creditors are circling, it may ultimately be necessary to consider personal bankruptcy in order to clear some of your debt;  
- Bankruptcy should not be considered an opportunity to restructure the ownership of your assets; 
- The courts have powers both to compel you to co-operate with their investigations into your affairs, as well as to unravel transactions intended to dissipate assets from as far back as five years before the bankruptcy;  
- Where the courts believe you have intended to defraud creditors with a transaction at an undervalue, there will be no time limit as to how far back they can go to unravel the transaction; 
- In some instances it may not even be necessary for the courts to demonstrate a fraud has taken place for them to establish an offence has been committed;  
- The cautionary tale of Jonathan Weal is a case on point - the former banker attempted to hide valuable artwork from his official receiver by failing to disclose its existence. He was caught out after having discussed his prized possession on regional television, and he now faces criminal charges and potential prison time. 

7. Beware social networking and media

- Whilst you may not be having your assets valued live on TV with your creditors watching on, the advent of social media has led to significant increases in the amount of our personal and private information finding its way into the public domain; 
- The ease with which this information can be accessed makes it all too simple for creditors to gather evidence to suggest you may be worth more than you are letting on; 
- Creditors have been known to use photos of debtors taken from Instagram and Facebook featuring high value assets to successfully ensnare debtors who have previously pleaded poverty. This evidence has been used in court; 
- Make sure not to undermine your asset protection plan by broadcasting the detail of your assets too publicly, and make sure your family members, friends and business associates take the same precautions. 

8. Do your homework

- If you can’t resolve issues with your creditors you may find yourself heading to court. Once in the witness box, it is imperative that you are able to explain the structure you have in place in respect of your own finances;  
- The court will not be pleased with unclear and woolly answers, and an indication that you yourself do not understand how your assets are owned may lead the court to infer that fraudulent activity has taken place; 
- Avoid the awkward questions by keeping your asset protection plans simple and clear, and make sure your advisors are fully informed of the changes you are putting in place so they can give you the best possible advice. 

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