1. Divorce. Marriage is a beautiful thing, but
it works only about half the time. A prenuptial agreement is a
good idea, but the courts routinely fail to uphold them. Recently,
the California Supreme Court set aside the prenuptial agreement
signed by a wealthy baseball player and his wife on the grounds
that "she wasn't sure she knew what she was doing," even though
she was represented by counsel at all times. Your best protection
is to establish a separate, private financial life that is known
only to you. The price of falling in love shouldn't include the
loss of all your assets when the flame dies.
2. Taxes. An IRS tax audit may leave you with a
large assessment for taxes, penalties, and interest that you are
unable to pay and that are not dischargeable in bankruptcy. The
cost of challenging the IRS in court is prohibitively expensive
for most people, and your assets are frozen if you choose to grind
your case through the court system. Better to have your assets
where the IRS can never seize them or know about them. Your best
protection is to establish a separate, private financial life that
is known only to you.
3. Medical expenses. Unanticipated medical bills
for you or a family member that are not covered by your health
insurance policy or HMO can become staggering. As a collection
attorney, I knew the best debts to take to court involved unpaid
medical bills. The debtor, or a member of his family, could rarely
argue they never contracted for or received the services. If the
debtor didn't go bankrupt, we'd get 25 percent of his paycheck
until we were paid.
4. Negligence lawsuits. These can be filed by
the customers of your business as the result of the activities of
your employees. Your delivery driver that gets drunk and slams
into a school bus is your responsibility. Oh, I know, we all carry
insurance, but what if your limits aren't high enough or the
insurance company refuses to pay?
5. Uninsured motorists. In an automobile
accident with an uninsured motorist when the damages exceed your
insurance policy limits, you may have to pay the
difference.
6. Sexual harassment suits or other claims filed
against you as an employer. This is a growing area of
litigation, which favors the plaintiffs.
7. A failed business venture. Your former best
friend, business partner, and confidante become your newest worst
enemy. IRS agents have stated on numerous occasions that the
primary source of independent informers on tax cheats is ex-wives
or girlfriends and ex-business partners. And as anyone knows,
blood is not always thicker than water.
8. Loan guarantees. You sign as a personal
guarantor for a loan to a family member or friend. The loan goes
into default and the lender sues you.
9. currently, the fastest
growing threat to your wealth is federal government.
Between the years of 1985 and 1995, government seizures increased
by 2,000 percent according to a congressional report. Yet
according to government watchdog groups, 80 percent of those who
have had their property seized were never charged with any crime.
The government knows most people can't afford to challenge the
onerous legal machinations of a federal agency. The notion of
innocent until proven guilty has been turned upside
down.
Any U.S. citizen
with property or financial assets located in the United States
should be aware of the threat of civil asset forfeiture. Over the
past twenty years, the federal government has quietly increased
its police power to confiscate your real and personal property.
All they have to do is allege that the target asset was somehow
used or involved in some ambiguous criminal activity and the asset
can be seized without notice. You may be tempted to dismiss this
threat as something reserved only for drug dealers and
money-laundering criminals, but I urge you to beware.
There are
currently over a hundred different federal forfeiture statutes
designed to cover any kind of misconduct, whether it be criminal
or civil. For instance, a woman in Los Angeles had her car
confiscated after the police arrested her husband in the car with
a prostitute. (As is she hadn't suffered enough.)
In Las Vegas in
the summer of 1998, the U.S. Customs Service
seized twenty-four checking accounts from a local bank without due
process of law. Eighteen of the accounts belonged to
innocent victims who had nothing to do with the U.S. Customs
investigation. Nevertheless, they were forced to spend tens of
thousands of dollars on attorney's fees in an attempt to recover
their money. In this case, with one affidavit from one customs
agent, the customs service was able to obtain a seizure warrant
signed by a federal judge in Southern District of New York,
allowing them to seize the accounts without any notice or hearing
of any kind. An isolated case? Maybe.
In 1988, when I
was still a practicing collection attorney, I had lunch with a
grizzled old federal judge. With wiry grey hair and the build of
an NFL linebacker, he was an ominous figure even without the
imposing title of federal judge. We were trading war stories about
the collection business and ruminating over the fact that the
people with the most money were the hardest to collect from. I
explained that sometimes a crafty debtor could transfer his assets
out of his name, making them hard to attach. At that time, Family
Limited Partnerships and Trusts were being touted as ironclad
asset protection devices, even though we routinely convinced
judges to pierce them, allowing my clients to seize the
assets.
As we cut into
our charred, medium-rare filet mignon, the judge let out sort of a
grunt. Not a laugh. Just one of those grunts that warns a trial
lawyer that his legs are about to be cut off at the knees. Federal
judges don't make big money, but they make up for it in power,
prestige, and their ability to deliver pain. And every one of
their orders is backed up and enforced by the full weight of the
federal law enforcement and military power. And…federal judges are
appointed for life. Forget contested elections, power-hungry
politicians, or any bar association, federal judges cannot be
removed from the bench short of egregious felonious conduct. A federal judge is as close to a god as a democracy
dares allow.
At the time of
our lunch, President Reagan and the law and order crowd had
convinced Congress that federal judges were not giving criminals
enough jail time. They thought the courts were "soft" on crime. So
Congress enacted legislation creating mandatory federal sentencing
guidelines, eliminating some of the judges' discretionary powers,
at least when it came to sentencing. The judge carped openly,
between sips of expensive merlot, about those "moron congressmen"
and their ability to curtail a federal judge's "constitutional
prerogative." History has shown the judge's rankling to be on the
mark. We now have prisons full of nonviolent marijuana users doing
ten years or more under the mandatory sentencing
guidelines.
As a gorgeous
tray of too-pretty-to-eat desserts was wheeled to the side of our
table, the judge announced that no one was going to screw with his
plan to exact pain on those "greedy bloodsuckers" that sent our
banks down the tubes. (I digress. At the time, the nation was in
the throes of a banking industry meltdown and the government was
looking for people to blame. They sued the borrowers, the bankers,
the lawyers and accountants who worked for the bankers, and anyone
else they thought they could recover money from. Because the banks
were federally insured, most of these cases ended up in front of
federal judges.)
The judge
relished the thought of the local bigshot real estate developers
being forced to give up their Gulfstreams and young trophy wives.
As a collection attorney, I interjected that even when rich people
seem to lose everything, they never end up living like poor
people. They always seemed to hang on to their cash and their
lifestyles. The judge pursed his lips, flopped his hand towards
the waiter, and in the manner that only a guest certain his
subordinate host will be paying the check can do, ordered a
generous snifter of brandy rated with enough stars to fill a
flag.
As he gently
swirled the mahogany colored brandy in his heated snifter, the
judge cleared his throat. An untimely interruption here could cost
you jail time. I sat up straight…and waited. Either he was going
to play the mentor and share some valuable tribal secret with me
or I was going to eat one of those "why the hell did you choose to
be a collection lawyer in the first place?" lectures. He gently
set his snifter directly in front of him and cupped both hands
around the bowl of the glass. He looked me squarely in the eye and
without a trace of emotion in his voice - but with the steely
resolve that only a man with the power to sentence someone to
death can give - he said evenly, "Bill, if you
can find an asset anywhere within my jurisdiction (i.e. United
States), I can seize it. Don't ever forget that." (I
didn't.)
With that, he
placed his starched white napkin on the table, thanked me for
lunch, and excused himself. It may not have been a tribal secret,
but it confirmed the worst nightmare of every defendant and
lawyer. No matter how carefully you attempted to protect an asset
- partnership, trusts, whatever - if a federal judge can find it,
there is a chance you could lose it.
This lunch was a
turning point for me. Something clicked. Epiphany, revelation,
awakening…whatever you want to call it, I realized I was in the
wrong business. I was pounding my way through the courts day after
day for a percentage of whatever assets I could recover from a
bunch of unwilling, feisty debtors. On the other hand, what people
pay to protect their assets from such a system?
If a federal
judge could locate an asset, he could seize it. A rational person
would argue that this is illegal, unconstitutional, or at least
immoral. And they would be right. But federal judges are appointed
for life; to appeal their decision takes years, and it costs a
fortune!
As the 1980s
ended, the banking industry was in shambles and dragging down the
real estate industry with it. At that time, my practice was
limited to doing evictions and collection work for the wealthy
owners of apartment complexes and other commercial buildings. Many
of these same clients lost their real estate holdings to
foreclosure and were preparing to be sued by lenders, partners,
and the federal agencies that insured the banks. They implored me
to find a safe haven for their cash and other liquid
assets.
As all lawyers
with a whit of common sense seem to do in their fifteenth year of
practice, I was suffering from burnout. A few years ago a poll was
taken of all California lawyers. Over 70
percent of those questioned admitted they would quit the practice
of law in a heartbeat if they could afford it. You have to
figure that half of the remaining 30 percent were fudging, so I
figure closer to 85 percent of all California lawyers would quit
if they could. They just couldn't bring themselves to admit they'd
wasted so much time and money to become a member of a profession
that offered so little beyond a steady income.
I, however, took
the plunge. After appearing in court for the last time in 1990, I
surrendered my license, moved to California, and carved out a
career outside the courtroom protecting people's
assets.
Recalling
the judge's words, I realized that any asset protection plan
needed to include two elements to succeed:
1. Privacy. To avoid seizure, an asset must be
difficult or impossible to find.
2. A safe haven. Some assets would have to be
placed beyond the grasp of my federal friend. That would mean
outside the United States. Let's consider the privacy issue
first.
Chapter
2
BULLETPROOF
ASSET PROTECTION