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book
BULLETPROOF A$$ET PROTECTION
by
William
S. Reed, J.D.
CHAPTER
1
IS ASSET
PROTECTION
AVAILABLE TO EVERYONE
I grew up in a
rural setting in the state of North Dakota. It shares its northern
border with Canada, so it gets cold there. With long, wind-chill
winters, a sparse population, and no sizable cities, people tend to
be self-sufficient. I was always taught that each person had a duty
to take care of himself and protect his family. Farmers and ranchers
grind out a living working the land or raising livestock. They view
lawyers and governments as Thomas Jefferson did, as "necessary
evils." They're law abiding citizens (Republican, mostly), but they
resent government intrusion with a fervor. The welfare rolls are
short, and the unemployment rates are low. The farmers live with the
uncertainty of bad weather that can ruin a year's work. There are no
ocean views, balmy beaches, or picturesque mountains. As Mark Twain
used to say, they're the kind of people that "make do." In other
words, they not only believe in the Bill of Rights, they also live
the Bill of Rights. Free speech, the right to assemble, and the
right to bear arms are all part of their lifestyle. Individual
freedom is not only paramount, it's one of their few luxuries. The
federal government is something to be tolerated, not
revered.
In the 1960s,
I left North Dakota to attend college and law school. The Vietnam
War was raging and my fundamental distrust of the government made me
a natural leader to protest our involvement. As much as the war, we
distrusted the government's leader, Richard Nixon. In 1968, he ran
for President on the platform that he would withdraw our troops and
end the war. He lied. After getting elected, he announced we could
not have peace "without honor." So, he escalated the war (remember
his "incursion" into Cambodia in 1970 causing the Kent State
imbroglio) causing tens of thousands of additional casualties. In
the fall of 1970, he substituted a lottery system for the draft in
hopes of deflating the antiwar movement. To some extent the ploy
worked. People like myself who drew high lottery numbers were
allowed to walk away from the fighting and the possibility of having
to move to Canada. Of course, we eventually lost the war entirely in
humiliating fashion. Everyone remembers the grainy footage of
desperate Americans scrambling to the roof of the U.S. Embassy to
hastily board helicopters as the Viet Cong rode into the city on
their tanks rejoicing in victory.
Eventually,
everyone's suspicions about Nixon's integrity were proven true.
After his impending impeachment and resignation, only a career
ending pardon from his successor, Gerald Ford, prevented him from
going to prison. Moreover, when the infamous White House tapes were
ultimately released, Nixon's paranoid tirades were revealed in their
unvarnished state.
With this as
a backdrop, I graduated from law school in 1975 and opened my law
practice as a sole practitioner. Business was slow, so I tended bar
five nights a week to make ends meet. As you might imagine, I
defended drunk drivers and a lot of divorce work. One of my
customers owned a large company that managed apartment buildings and
other rental properties. He figured I'd work cheap and appreciate
having any work at all. He was right. I was introduced to the world
of evictions and collections. Over the next fifteen years I
developed a legal machine that specialized in processing county
court eviction and collection cases.
We garnished
paychecks, seized bank accounts, liened houses, and snatched
automobiles. As the years marched by, I learned firsthand from the
defendant-debtors how to protect assets from a court judgment. I
just knew some debtors were careful not to have anything in their
own name, to make sure their wife owned the house and that their
other assets were held by a corporation. We were handling over 1,000
cases a month, so when we got a judgment and couldn't garnish a
paycheck, seize a bank account, or lien a house, we dropped it and
moved on to more collectible cases. Most collectors recover between
ten and thirty cents on every dollar owed and we were no different.
Volume was the key. Lots of cases, dump the difficult ones, press
hard where there were assets. Business was good, the karma was
bad.
With the
passage of the 1986 Tax Reform Act and the subsequent collapse of
the banking industry, many of my wealthy real estate clients lost
their apartment buildings to foreclosure and were sued when the
buildings sold for less than the mortgage amount. That was 1988.
They came and implored me, "Bill, where can we put our money where
it's safe?" So I went to the library (that's the building we used to
go to before the Internet) and discovered the fledgling world of
asset protection. In 1990, I appeared in court for the last time. I
traveled to dozens of countries to learn first hand the mechanics of
asset protection and which jurisdictions specialized in helping
Americans protect their assets from lawsuits and governmental
agencies. It was the best decision I ever made.
For almost
ten years I've been helping people protect their assets from
lawsuits, lawyers, or worse. And although it generally goes
unspoken, most people wonder if protecting their assets from private
lawyers and the government is legal and (dare I say) moral. With
regard to the legal question, the short answer is, "Yes, it's
legal."
It's
interesting to note that most people understand why wealthy, English
rock stars renounce their homeland to protect their assets. No one
was shocked when the grandsons of eccentric billionaire oil tycoon
John Paul Getty renounced their U.S. citizenship and became tax
refugees by becoming Irish citizens. Or that Madonna, Michael
Jackson, or O.J. Simpson has used corporations to shield their
wealth from creditors. In the United States, we have a double
standard when it comes to asset protection. When wealthy, famous, or
powerful people protect their assets it's called "financial
planning," but when everyday people like the rest of us move our
assets out of the reach of lawyers, it's called "defrauding our
creditors." And, if an arm of federal government is involved, such
as the IRS or the U.S. Customs Service, they'll describe your
activities as a form of "money laundering." Asset protection is not
a privilege, it is a freedom protected by the Constitution. However,
as the late filmmaker Samuel Goldwyn once said, "Timing is
everything."
Don't wait
until you're a defendant in a lawsuit or the target of an IRS
investigation to consider protecting your assets. If a creditor has
a legitimate claim against an identifiable asset, it may be against
the law to transfer or sell that asset. Most states endorse the
Uniform Fraudulent Conveyance Act that prohibits a debtor from
transferring his assets with the intent to hinder, delay, or defraud
a known creditor. You've got to protect yourself before the storm
approaches, not in the middle of it.
A few years
ago, a young, smart plastic surgeon came to my office to ask about
asset protection. At the time, he didn't have any assets. In fact,
he was in debt for his student loans and other expenses incurred
while he learned to be a doctor. But he had recently joined a
medical group of other plastic surgeons and was confident about his
financial future.
We formed two
Nevada corporations and one offshore corporation to own or mortgage
any real estate he had and to hold any other liquid assets he
intended to acquire. As the years ticked by, my client bought a
house, leased a new Mercedes, and set up an offshore stock brokerage
account. He maintained each of his corporations, keeping them in
good standing, and always used me as his nominee officer and
director.
A few months
ago we had lunch and he showed me a thick stack of legal pleadings
naming him as one of the defendants. The plaintiff was a disgruntled
patient of one of the other surgeons in the medical group. Her
breast enlargement wasn't big enough, allegedly causing her pain and
suffering, emotional distress, and dysfunctional sex life. Although
my client had never even seen this patient, her lawyers were careful
to name all the doctors in the group, hoping for a larger
settlement.
Although the
medical group carried liability insurance, each of the doctors still
had some potential personal liability. Further, the more the
insurance company was required to pay, the more their premiums would
go up. My friend went on to explain that before any answer or
responsive pleading was filed, his attorney explained to plaintiff's
counsel that he had no assets. Counsel for the plaintiff laughed and
turned the matter over to a private investigator. After searching
the Internet, real estate and banking records, and obtaining a
complete credit report, counsel for the plaintiff grudgingly was
forced to admit that my client owned nothing. The case against my
client was quietly dropped.
His timing
and foresight were impeccable. To this day he carries on as a
plastic surgeon with a minimum of malpractice insurance, doing the
work he genuinely loves.
The other
unspoken question surrounding asset protection goes something like
this, "All right, it's legal, but if I do this am I some kind of
cheater or shyster?" In other words, people are concerned that they
will be accused of abiding by the same moral code practiced most
members of the legal profession if they shield their assets from the
courts. Without delving into any kind of philosophical or religious
discussion of morals, I can only say that once you have accumulated
assets, you can be sure any money-hungry lawyer or federal
government agency will not allow any moral code to dampen their
enthusiasm for seizing your cash.
Here are just
a few of the areas where your
wealth may be
threatened:
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.
Bulletproof Asset Protection Chapter
2 |
