There is much misconception about asset protection. There are reasons for that, for example, where an asset management advisor misguides his client by making him believe that assets can be protected by transferring them to a tax haven or by creating a complex plan. But they forget that an important aspect of asset protection planning is to safeguard against litigation.
Hence asset protection planning requires to review in anticipation all conceivable types of litigation. The nature of asset protection planning therefore requires a pre-litigation planning. At times, problems can arise where asset protection planner possesses a limited legal knowledge or lacks the same completely. In these circumstances important human facets of litigation and its processes are overlooked. Such mistakes can cause losses.
In recent years an increased litigation in asset protection planning cases is being witnessed. And this is a real testing time for protection planning, generally made by real-estate planners. In many plans, the professionals are being accused of violation of due diligence. It is yet to be concluded whether or not plans developed by non professionals will be effective.
I intend to emphasise here the importance of clarity in the asset protection plan and effectiveness of perceived goals. May be in some cases, a client does not need more than an insurance coverage, but where planning is being proposed, its efficacy and legality is to be kept in mind which will determine the prudence on the part of the planner.
An awareness about litigation presupposes that we understand the outcome of remedies being sought or suggested, as each case has its peculiar set of circumstances and these set of facts lead to results. All recipes must be understood in the context of facts and circumstances of each case.
There is another aspect of the litigation, that is, it brings out all the dirty laundry and all the secrets. In these circumstances, the attorney client privilege is also subject to stake. It may be noted that there is no privilege available to the information shared with real estate planners, accountants and other similar professionals resulting in a serious threat to secrecy. So where litigation arises secrecy withers away. It results in tax evasion protections. The basic cause for such eventualities is retaining control over the assets.
Actions of the creditors against debtors are the external threats to secrecy, because post-judgement creditors in most of the jurisdictions can obtain debtor's personal tax returns, business tax returns and that can lead to many other litigations, since creditors can demand all types of information including bank accounts and telephone bills.
In order to maintain secrecy to the extent possible, the planning must be done by an attorney to take advantage of privileges and immunities. We may now consider what kind of evidence can harm an asset protection client. I may add that clients are most likely harmed by marketing materials of an asset protection plan. This information is very easy to find and the same is not protected as a privilege or immunity, and these materials can easily be used by the courts as actual evidence of intent to defraud creditors.
This brings us to consider what duties a planner has towards its clients? A planner in my view should either handle the litigation himself or must ensure that the client retains a competent attorney. There can be a good question here, why do creditors or his attorney bring such an action? In my view the intent is to drive a wedge between the planner and his client and to pressure the debtor to assist the creditor's attorney to locate or recover the assets. In such a situation the client and planner both are used and planners insurance will look upon this as an opportunity and reason to pay out very little under the planner's policy, or it can stop paying the defence costs. It can switch the planner's loyalty against his client. So in such situations what is generally done? First, the planner is either threatened or sued for malpractice.
Second, where the planner is an attorney a complaint can be filed against him in the bar counsel. Third, a bad faith litigation. Fourth, a suit against the insurance company, seeking to force it to fulfil its obligations under the policy. Creditors in such situation also use law enforcement agencies to start looking around in the affairs of the debtors. These situations tell the litigant parties that the one who fights to the end, can win a good settlement.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates.)