Asset Protection

2.1 Persons of means invariably undertake some form of Estate Planning during their lifetime.  This is usually designed to take effect only after their death, and usually involves a combination of Wills, Will Trusts, and living (or "inter vivos") Trusts. 

2.2 Creditor Protection Planning may be regarded in a general sense as nothing more than a precursor of Estate Planning.  The distinction is that in Creditor Protection Planning, the arrangements made during the individual's lifetime are immediately effective to restructure and protect the ownership of specific assets, and do not merely take effect on death. 

2.3 The groups of "high risk" Professionals in the United States that have faced the worst escalation in their professional liability insurance premiums include surgeons, obstetricians/gynecologists, and anesthetics.  But the accountancy/audit and legal professions, civil engineers, architects, and many other professions must also be included with the "high risk" list, as they too have been drawn into their own types of high stakes litigation. 

2.4 The litigation explosion in the United States is well-documented phenomenon, and its causes need only be briefly identified here.  It results from a combination of factors, including a rapid proliferation in the size of the legal profession; the 'contingent fee' system; continuously expanding theories of legal liability; the setting of damage awards by Juries; and a tendency for Juries to make 'punitive' awards.  Successful Plaintiffs can literally win a jackpot. 

2.5 The United States Government's Tort Policy Working Group issued Reports in 1986 and 1987 on the crisis in insurance availability and affordability.  In successive Annual Reports, the Chairman of Lloyds has also commented on the effect of this on underwriting in the London insurance market.  And most recently, Vice President Dan Quayle referred to these issues in his address to the American Bar Association on the 13th of August 1991.

2.6 This explosion of litigation and high damage awards has caused underwriters to introduce skyrocketing increases in professional liability insurance premiums.  Professional insurance has become barely affordable.  Some groups of professionals have opted for self-insurance.  Other professionals have continued to practice, albeit 'naked' (i.e. without insurance).  And yet others have simply ceased to practice. 

2.7 Those who continue to practice are doing so in full awareness of the risk that one claim against them that is successfully litigated may wipe them out.  Indeed, enforcement of the jury award may also lead to personal bankruptcy in the home jurisdiction. 

2.8 In this context, Creditor Protection Planning is highly attractive.  It offers such professionals the possibility of placing the "nest egg" part of their savings into a 'reserve fund', immune from potential claimants.  A portion of their life savings can be immunized from ruinous 'jackpot' jury awards in future lawsuits brought by patients or clients.  As a result, the professionals can continue in practice safe in the knowledge that, whatever litigation may arise  in the future, they will not be totally wiped out.

2.9 There are, of course, many different motives for establishing CPTs.  At one end of the spectrum is the type of planning which is undertaken by such wealthy professionals at a time when seasons are calm.  They are not being sued.  They are not in dispute with Clients or Patients.  They are solvent.  They have no immediate worries.  They are ideal CPT Clients, who simply wish to put a portion of their assets aside for a rainy day. 

2.10 Moving across the spectrum, one finds a second, more recent wave of CPT Clients, who have emerged as a result of the economic downturn of the late 1980s.  Businessmen, property developers, Lloyds Underwriters, and others gave personal Guarantees to banks and other lenders at times when markets seemed to be going upwards forever.  At the time such Guarantees were given, the Guarantors would never have considered they were putting their entire wealth at risk. 

2.11 Businesses and markets are now in difficulty.  There are major declines in property values across the board, and the Banks are being ruthless with their loan portfolios.  As a result, many of these individuals now face calls under their Guarantees.  Due to the overall reduction in their personal financial statements, such calls might lead to their financial ruin. 

2.12 Moving further across the spectrum, one finds Trusts established in contemplation of imminent matrimonial break-up.  The sole purpose of the arrangement is to shelter or conceal assets from the ensuing financial settlement, and confound the application of home country laws and public policy rules. 

2.13 CPT planning for these types of Clients is more difficult, and can be controversial. 

2.14 At the extreme end of the spectrum one finds the most controversial type of CPT planning, where the motive is actively to hinder existing creditors.

2.15 As noted above, Offshore Trusts are often the preferred vehicles for such planning, as the incompatibility of the legal systems of the home and host country reinforces the untouchability of the Offshore assets.

2.16 But Offshore Trusts do not provide a simple solution to all perceived problems.  If they are essentially being used just to hide assets, some of the types of CPT planning will probably be unsuccessful in both the home jurisdiction and the Offshore host jurisdiction, for reasons explained more fully below.