Nobody needs to be told that society has become increasingly litigious. Ask any lawyer and he will tell you that people have become increasingly self-entitled - someone (or some organisation) adjudged to have done the wrong thing must not only repay and apologise to a victim, but will often be asked to provide oversized compensation for the hurt and offence.
It tends to happen to big companies or government-related entities in the West more than it does to smaller firms and individuals, but we are all in the firing line. We have all heard of the individual who has been made bankrupt by a lawsuit and, likewise, we have heard about those who seem to have got away scot-free.
In the pantheon of litigation, there is the man who was sued for everything he owns, lost the case and still seemed to be no worse off for it. Then there was the well-known colourful businessman whose business went into administration, was declared bankrupt, only for him to reappear happy and thriving just a few months later.
What was the difference? The smart ones had good lawyers, some may have whispered. Perhaps everything was in the wife's name? There may be truth in this, but the success or not often lies in the use (or not) of asset-protection structures.
This article is not seeking to endorse asset protection, only explaining how it may be used. It can be used both legitimately and illegitimately. The same legal tools used to protect the innocent from the rapacious may be used by the guilty to thwart truly injured parties. Asset protection has one real purpose only - to put as many legal barriers between a person wanting something and someone who doesn't want that thing to be taken.
At some stage, many expatriates in the UAE will leave to return to their home countries, hopefully with a range of investments and assets, such as a house and holiday homes, to their name - all of which they will have to protect.
Protection without legal structures
A very common move is for a husband working in a high-risk business to put the ownership of all assets (say the family home and cars) in the name of a spouse who is "not at risk". So the wife is on the title of the house and the rest of the family have what is termed "beneficial ownership". Good protection? Possibly not. When family assets are held by one spouse, extreme care needs to be taken in relation to the terms of the will of that spouse. Upon the death of the spouse, the assets will transfer automatically to the surviving spouse. This spouse not only is shattered by the death, but may also become more shattered by realising the family assets are now at risk when turned over to the "at-risk" husband. A creditor or litigant, with no respect for the personal loss, may swoop.
Should they separate or divorce, the courts that deal with family matters will look behind any ownership structure when deciding how to divide the assets. Care needs to be taken if there are concerns over the long-term viability of the marriage.
Another method is to protect assets by allowing a trusted friend to own the legal interest in the assets. The friend allows the benefit and control of the asset to stay with you. The arrangement is not documented and can even be untraceable. The trusted friend is the legal owner.
The problems with this arrangement occur if the trusted friend "gets into trouble" if he decides, on second thoughts, not to transfer the legal ownership back.
Protection with legal structures
To avoid some of these problems, the most commonly used asset-protection structure is a trust, but companies are also used to provide "layering" around assets. A trust is basically an agreement or a promise. A person or company agrees to hold assets for the benefit of another. The one who legally owns and controls the assets is called the trustee; those who benefit are known as beneficiaries.
The trustee has legal control, but this is a legal title only. A person with legal control can buy and sell an asset, but will never own or enjoy the benefits of ownership, such as income or usage. It's the trustee's name that appears on all legal documents and bank accounts, for instance.
Asset-protection specialists will tell you that a structure must be developed that incorporates the principle of separating the legal ownership of the assets from the person who uses them and enjoys them. Think of it like this: if a person has a car, but it is owned by a finance company, then they still enjoy the benefits of using it - and full control over the use of the car. They are beneficiaries, but not owners and the creditors cannot touch them. When a creditor comes calling, he can only deal with a legal owner, not the car's beneficial one.
In the same way, the beneficiaries of a trust can enjoy usage of assets - but even more than this - they can have all the income and profits even though legal title is in the trustee's name. In this way, the trust is split into three ideas - ownership, control and benefit.
Say a professional or a business is sued by either an employee or a client, the assets could be protected because they can be remotely owned by a separate entity and used under a licence agreement.
In such a circumstance, all the business owner does is wind up the trading company that is being sued, establish a fresh one with which to transact further business and re-establish a new licence agreement (see illustration, above).
Take another situation that adds yet another layer to the structure. The Smith family (mum, dad and two children) sets up the Smith Family Trust. The family home is owned by Mrs Smith because she is in non-risk employment, while Mr Smith is a highly successful businessman in a high-risk field. The business, beach house and the expensive cars they own are legally owned by the trust. The trustee is Smith Pty Ltd, of which Mr Smith owns all the shares.
Control of the business, beach house and the cars is with a new entity, this time known as the appointor - also Mr Smith.
Legal ownership of the business, beach house and the cars is with the trustee - Smith Pty Ltd.
The sole shareholder and director of Smith Pty Ltd is, well, Mr Smith. He is effectively the trustee and the controller of the assets, even if he is not the trustee in legal name. Beneficial ownership is with the family members, of which he is also a member. To all outsiders they look like a family that conducts its own business and owns a house, a beach house and drives expensive cars, but all the assets are at removes from each other.
All the same, Mr Smith is everywhere (and nowhere) and the courts may consider the structure to be a sham. One idea would be to appoint an independent person to be the appointor or to act as a joint appointor with Mr Smith. This moves the sole control away from him and overcomes the potential "sham argument".
No asset-protection strategy is foolproof and one would like to think that if there are legitimate reasons to break through a trust arrangement, it can be done. What is certain, however, is that by using structures, it will take longer for the litigant or creditor to break through them and cost them more money to do so. Without them, people are more vulnerable. They provide a kind of "sleep soundly at night" factor for those who work in high-risk fields.