The following information is an example of the contents of a typical monthly newsletter and the subjects covered.

Table of Contents

 Equity Stripping
 House and Senate Pass Bill To Repeal Estate & Gift Tax
 More News About Extreme Lawsuit Cases
 Bankruptcy And Medical-Malpractice Reform May Not Be Passed This Year
 U.S. Supreme Court Overturns Congress on Miranda Warnings
 Medical Doctors Face New Legal Challenge
 U.S. Expands Scope of Suspicious Activity Report
 ACLU Uncovers New FBI "Carnivore" System To Read Email
 Unauthorized Use of Credit Card Hits Home
 Large CPA Firms Finally Get some Liability Relief
 Do You Have Clear Policies About Employee E-mail?
 Conferences & Seminars  

Dear Friends and Subscribers:

The HOT news in the offshore world is about the recent "crackdown" by the OECD and other high tax nations on the small island tax havens -- in the name of curtailing money laundering. Those of us who are inclined to be suspicious of the real motives of government suspect the real reason for this challenge is the loss of tax revenues by the high tax "big brother" countries of the world. Because there is a lot of controversy and dispute about the "who, what, why, when and how" of this issue, I'm in the process of compiling a "special report" on the subject, with the working title of "Big Brothers Bully Small Tax havens". It seems to me that this development will be relevant to all three of my newsletters and I wasn't able to decide which newsletter should include this news information. So I've separated this material into a special report that will be available to all of the paid subscribers who have email. Printed copies of the report will also be available but I don't have any idea what the price will be at this time. But this issue of Global Asset Protection includes an article about an often mentioned but rarely studied concept -- called "equity stripping". This issue also includes an assortment of current news about asset protection issues.

An asset protection strategy that has been mentioned in many articles about asset protection has rarely been discussed in any depth. It's called "equity stripping" and is most often advocated as a way to protect the equity in real estate or even a business when other alternatives are exhausted.

Real estate can be protected to some extent with joint tenancies by spouses or with land trusts. Residential real estate equities are protected in some states by unlimited homestead exemptions, but most states only protect a modest amount from the claims of creditors. Putting real estate or businesses into family limited partnerships (FLP) or limited liability companies (LLC) is another option but it's not fool proof because results oriented judges can find ways to penetrate these entities in the U.S. Some advisors therefore suggest that the real property or the business be owned by a FLP or LLC that in turn is owned by an offshore trust. But even that is less than certain because the U.S. judges can rule that the offshore trust is a sham and order a transfer of the real estate or business assets to a creditor. (The local judge has jurisdiction over local property.)

Critics of the U.S. FLP/LLC and the offshore trust therefore advocate "equity stripping" as a way to remove the value from the property so that it has no appeal to any creditor. However, in a review of the table of contents and the index of half a dozen asset protection books/manuals in my office, there was no mention of the subject. Either the authors of these books don't consider the strategy to have any merit or they assume it's so obvious that it needs no explanation. I believe it does need some explanation and some discussion of the advantages and disadvantages.

What is Equity Stripping?

In it's simplest form, it simply means that you remove (strip) the equity from some property that you own by encumbering it with the maximum possible debt. For example, if you live in a state that does not have any substantial homestead protection (and other asset protection methods are not available), you could take out a loan secured by the home equity. Where I live, some mortgage lenders are offering to loan home owners up to 125% of the equity in their home. Of course, the interest rate is very unattractive, but it can be done. I suspect the same kind of deals are available where you live.

However, if you want more reasonable home equity or real estate loan rates, you will most likely be limited to loans equal to about 75% of the equity in the property. (You may be able to do better with a "sweetheart loan" as described later.) If you own some rental real estate that you inherited from your parents it's most likely debt free. Debt free income producing property would be very appealing to any creditors. The property would be much less appealing if it were encumbered to the extent of 90% of the appraised value of the property. A secured and unrelated mortgage loan lender would get preference over an unsecured general creditor in any debt settlement arrangement.

Property owned by a business could also be encumbered by debt in order to "strip" out the equity. You could even encumber the stock that you own in a family corporation by taking out a loan from someone and pledging the stock as collateral. Basically, "Equity stripping" simply means arranging to borrow money using some asset as collateral. Usually, the asset is one that has substantial value and little or no existing encumbrance.

When property is encumbered, the loan must be recorded to be secured. This gives notice to any potential plaintiff that the property would not be an easy way to collect on a judgement from you. Most lawyers will check these records before they agree to take on a contingency fee case.

What Do You Do With the Loan Proceeds?

Let's assume that you have some rental property (or a home) with a value of $1 million and it was debt free. You arrange to borrow $900,000 and pledge the real estate as collateral to the lender. Now then, what do you do with the $900,000? If you just stick it in the bank or invest it in some stocks or other investments, those investments will be available to any judgement creditor.

Clearly, you have to the put the loan proceeds into some kind of protected entity. One choice is a FLP or family owned LLC. But if you own substantially all the partnership or LLC interest, there is still some risk that a judge will penetrate that entity and award the property to a creditor. That's more likely than the chance that a judge will order a FLP or family owned LLC to transfer some real estate to a creditor -- which was one of the reasons why some folks advocate equity stripping.

If you are going to go the trouble and the expense of borrowing against some assets, you will need to move the assets offshore for maximum protection. The greatest protection from creditors is to put the money into an offshore trust in which you do not have enough control to give a judge any grounds for holding that the trust is a sham. (See my special report on the Anderson case.) Another option is to put the money into a Swiss offshore annuity which has some asset protection features or to put the assets into an offshore life insurance policy. Another option is to put the loan proceeds into a foreign LLC and to make gifts of substantial interests to your spouse and children so that you are not the sole member of that LLC. It would also help if you operate the foreign LLC as an active investment fund or even as a business. However, there are tax reporting obligations and some choices that should be discussed first with an international tax advisor.

What About "Sweetheart Loans" From Related Parties?

It's probably pretty obvious to most readers that borrowing from commercial loan sources is going to be a costly way to protect some equity from potential future creditors. And, you will need to retain enough assets to be able to pay down the loan as required by the loan agreement. Loans from commercial sources are not permanent loans. If it's a balloon note, it's unlikely to be for more than five years. And the interest expense is a major deterrent to equity stripping. These are issues that are rarely discussed by those who blithely mention equity stripping as a way to protect your assets.

Those who advocate equity stripping assume you can make a "sweetheart" loan deal with some related person or entity. Let's say that you own a corporation that has some excess cash. The corporation can loan money to you and take the equity in your home or some rental real estate as collateral. Even if the loan interest rate is a going (market) rate, it's like paying the interest to yourself -- if you own most of the corporation. Of course, the corporation must pay taxes on that interest income and you may or may not be able to deduct the interest. But, if you control the corporation, the assets are still at risk because a judge could conclude the corporation is merely your alter ego and should be ignored as a separate entity.

The better kind of "sweetheart" deals involve related persons such as parents or even children. Where they have funds of their own and where the terms of the loan are comparable to a commercial loan, you can offer them an attractive rate of interest on a loan that is secured by your home or other property that you own. Another option is to put some money into an offshore trust and to then ask the trustee to make a loan to you that is secured by your real estate or other hard to move assets. But, if the trustee is not sufficiently independent to be able to refuse such a request, there is a good chance that a U.S. judge would hold that the trust is a sham. And, even if the trustee does give you a loan, then you have to gift the loan proceeds back to the offshore trust to remove the loan proceeds from being accessible to your creditors. (Tax issues are discussed below.)

Beware of the Fraudulent Transfer Laws

No matter how you manage to dispose of the loan proceeds, you need to be sure you are not going to be guilty of a "fraudulent transfer" to "hinder, delay or defraud" your creditors. An outright gift to a foreign trust within the statute of limitations could be a fraudulent transfer unless you retain enough assets and/or income to satisfy all of your financial obligations. (See my article on solvency in our lawsuit protection web site.) A transfer to any person in the U.S. by gift could be recovered within the statute of limitations (usually four to six years) if you were not solvent at the time you made the gift.

Some Tax Issues

There are some very tricky tax rules these days with regard to interest on loans. Generally, any interest paid on a loan that is secured by a personal residence is deductible -- within some limits. Interest on residential first mortgage loans of up to $1 million is deductible without limit or restriction as to the use of the funds. You can also deduct interest on second mortgages or home equity loans of up to $100,000. However, if your adjusted gross income exceeds $126,600 (1999 numbers) the interest deduction may be reduced by 3% of the excess -- and that's an overly simplified explanation. Interest for loans on rental real estate is usually deductible as investment interest expense -- which is generally limited each year to the amount of your investment income. Otherwise, the deductibility of interest expense depends on how the loan proceeds are used. If they are used for a trade or business, then the interest is usually deductible. But where the loan proceeds are gifted to a family member or a foreign trust, the interest is not going to be deductible, unless the loan is secured by a personal residence. With a foreign trust, the grantor must pay taxes on the income of the trust. If the loan interest is deductible, then the income and expense offset each other. But if the loan interest is not deductible, you could be in a position where you have to pay taxes on interest income you are paying to yourself but which you can't deduct.

A complete discussion of the tax rules applicable to deducting interest expenses is way beyond the scope and purpose of this article, so if you are serious about equity stripping and if an interest deduction is important to you, then you need to consult with a tax professional.

Some Legal Details

Proper and timely legal transfers of ownership and the recording of any liens against property that you offer as collateral for a loan is essential or the entire deal could fall apart. Loans with unrelated parties don't need to meet any standards for an "arms length loan" but loans from related persons or entities do need to meet the "smell test" for reasonable loan terms. Otherwise, a court could dismiss the loan as a sham transaction. Where you are the owner of an entity that makes a loan to yourself secured by your property, many judges will be inclined to disregard such entities by holding them to be your "alter ego" and you will be ordered to unravel the arrangement.

Be very wary of suggested deals where there is no transfer of assets or cash but your property is magically "encumbered" by having a foreign corporation or foreign trust simply file a lien against it. If the entity doesn't have the assets to actually write a check, then the arrangement is not going to be given any credence by any U.S. court.

The most secure method of equity stripping is to have a bone fide foreign asset protection trust that is not controlled by the trust grantor enter into a voluntary arrangement to loan money at a reasonable rate of interest to the trust grantor to be secured by property owned by the grantor.

To my surprise, the U.S. Senate pushed through the Death Tax Elimination Act of 2000 (House bill H.R. 8), which was passed by the House on June 9, 2000. However, President Clinton has promised to veto this bill, which is apparently what the Republicans expect and want. As much as the Republicans may actually want to repeal this tax, it seems they are more interested in having a campaign issue for the fall elections that is popular with the Republicans. Although the federal estate tax only affects 2% of the taxpayers who die, repeal of the tax seems to be popular with Republican voters and some Democrats.

Taking its cue from the infamous "McDonald's Scalding Coffee Case," in which a woman obtained a multi-million dollar verdict after spilling a cup of hot coffee she had placed between her legs while in a car seat, http://www.scaldingcoffee.com provides a one-of-a-kind satirical look at legal news and the legal profession. [ Source: Internet News Bureau - www.newsbureau.com ]

According to the July 10, 2000 issue of Lawyer's Weekly USA, "Although there's still a chance that bills to reform the bankruptcy system and allow patients to sue HMOs will pass this year, time is running out as Congress rushes to approve spending bills that must be passed before it can adjourn for the fall elections, experts tell Lawyers Weekly USA."

Either these bills won't be passed this year or they will be rushed through with some kind of last minute political compromise that is typical of how controversial bills have been passed in recent years. While there may some redeeming elements in the bankruptcy bill, it seems to be mainly for the benefit of credit card companies and would include some "reforms" that are not desirable for most readers of this newsletter. Even if the bankruptcy bill does pass, Clinton is expected to veto it. According to Daniel C. Stanley, Editor of Fresh Start, (danstanley@bankruptcyservices.net)….

"President Clinton believes the Bankruptcy Reform Bill, which lawmakers have been tinkering with for weeks behind closed doors, still lacks the needed balance of protecting deserving debtors while also stemming abuses of the bankruptcy system. He made this clear in a recent letter to the Speaker and to Democratic leaders of the House of Representatives and the leaders of the Senate. Sen. Charles Grassley, R-Iowa, a chief sponsor of the legislation, called Clinton's letter an "obstructionist tactic." But Sen. Paul Wellstone, D-Minn., who has used his "Senatorial power to hold up the bankruptcy legislation, said "I look forward to working with the president to defeat it." You can read the text of the President's letter at: http://www.abiworld.org/research/clinton.html

As for the medical-malpractice issue giving patients the right to sue HMOs, I have to believe that this is another case of political mis-direction. The HMOs are being blamed for a problem that is largely created by the U.S. Congress and the current administration. They are being required to

provide expanded medical care for more people and to do it at a lower total cost to the U.S. treasury. Their response has been to put the squeeze on doctors to not advocate some procedures or to not make referrals to specialists. Basically, I see the HMO as the beginning of a rationing system for health care -- which is the inevitable outcome of any system managed by government. If the Congress now expands the rights of patients to sue the HMOs, the only likely outcome is that we will eventually have fewer HMOs and more rationing. This will also result in a higher cost of medical care to accommodate the cost of the litigation awards -- much of which will go to the personal injury lawyers rather than the patients.

There are some who feel that Miranda warnings are merely an obstacle for the police and that the requirement to inform a suspect of his rights is abused by defense lawyers. A few years ago, Congress passed an obscure law to permit confessions (without a Miranda warning) if they are voluntarily given. However, the Supreme Court has just held in a 7-2 decision that the requirement for the Miranda warning was Constitutionally based and could not be changed by the Congress. Law enforcement agents at all levels of government will have to continue to warn a suspect of his rights before a confession is valid. [ U.S. Supreme Court, Dickerson, v. U.S., No 99-5525, June 26, 2000 ]

An article by Sylvia Hseih in the July 10, 2000 Lawyers Weekly USA indicates that some personal injury lawyers are moving away from trying to prove negligence and focusing instead on a failure by the doctor to secure "informed consent" from the patient. A duty to inform the patient of the risks of treatment has been standard in surgery for many years, but it appears it's now being used more often in non-surgical cases. Thus, the jury merely needs to be convinced that the patient was not adequately informed as to the risks of treatment and the availability of alternative treatments. Meanwhile, the Congress is ostensibly trying to pass a medical-malpractice reform law that would not take this new legal tactic into account.

U.S. banks are required to file reports with the Financial Crimes Enforcement Network (FinCEN) for any financial transactions that are deemed to be "suspicious". Until now, that has generally been deemed to mean transactions aggregating $5,000 or more of suspected criminal activity, or suspected money laundering. However, the rules have been less than vague, and have only applied to certain financial "institutions" -- meaning mostly banks and savings associations and credit unions. In March, 2000, the U.S. Office of the Comptroller of the Currency issued an "Advisory Letter" which list certain businesses as "high risk" and as requiring greater scrutiny than other businesses. Such "high risk" businesses include,

• Financial institutions or agents of financial institutions
• Buyers or sellers of motor vehicles, aircraft, mobile homes, vessels and farm equipment
• Individuals or firms engaged in the practice of law, accounting, investment advisory services or medicine
• Auctioneers
• Individuals or firms engaged in chartering ships, buses or aircraft
• Those engaged in gaming of any kind -- other than parimutuel betting at race tracks
• Real estate "closings" and trade union activities

[Source: Money Laundering Alert -- www.moneylaundering.com ]

The American Civil Liberties Union (ACLU) is trying to force the F.B.I. to disclose details of a computer system (hardware and software) called "Carnivore" that is designed to snoop on e-mails. According to the ACLU, Carnivore is a computer device that can be attached to the network of an Internet Service Provider. The device then scans emails and copies the emails of anyone under investigation. According to the F.B.I., they only use the device after getting a search warrant. However, in order to find emails from the person under investigation, the device is scanning the subject lines (and other header information) of everyone using the ISP services - even though they are not under investigation. The unintentional use of certain "sensitive words" in a subject line could then result in triggering a more detailed investigation of an individual. The system searches for telltale words or names and also tracks visits to websites and other Internet activity by customers of the ISP. This is one more reason not to engage in the use of sensitive words or to discuss highly private matters via email. (Sensitive words would be any words that would cause a paranoid government agent to become curious or alarmed.)

Except for really stupid criminals, the people the FBI are looking for are not likely to use any words that might set off the Carnivore system. It's the totally innocent people who have no idea the system even exists who are most likely to set off bells and whistles with this kind of system. Don't forget that government agents do not need to prove that you are guilty of any crime in order to confiscate your property. They only need to allege that a crime may have been committed. The Carnivore system will give them a lot more opportunities to find alleged criminals.

Problems like credit card theft become a lot more real when they affect you. My wife has a company credit card that she uses to purchase certain office supplies and some services. Recently, while she was on a few days of vacation, my wife's employer discovered that her company purchasing card had been used to purchase the use of a stretch limo, to gamble at a local casino, to purchase some hotel accommodations and an assortment of other travel type expenses. But -- her card does not permit this kind of purchase, which means the merchants did not attempt to get authorization when the card was used -- over the phone. When the company called to ask her if her card had been lost, she found it was still in her purse. The unauthorized use of her card had been accomplished without actually having possession of her card. We still don't know who did this or how, but it seems that it must have been the result of giving the credit card number to one of the companies with whom my wife's company does business on a regular basis. Her company is still investigating, but it's more than a little disconcerting to discover that such things really do happen.

If you are a credit card merchant, you might think about verifying phone-in orders before you provide the services or products. It seems likely that the merchants will bear this loss rather than the card company (AMEX) because it is a limited use card and the merchants obviously did not get advance approval for phone-in orders.

The Private Securities Litigation Reform Act of 1995 provided some protection to CPA firms for being held liable for the full damages awarded by juries even when the primary fault was fraud by top executives of client companies. The CPA firms were often stuck with the awards granted by juries on the joint and several liability theory. The February 2000 issue of The Journal of Accountancy reports that a recent case (Health Management, Inc., US District Ct.) was the first to establish that the new law would work. The case was the first to go to trial, because more than 700 others subsequent to the 1995 reform law had been settled before trial.

"Now-A-Days", lawyers involved in litigation will immediately demand access to copies of all the e-mail messages sent or received by company employees. While it does make sense to have a system for erasing old email messages, you should assume that every email message ever received or sent by any employee can be found somewhere in your computer archives, if not in the archives of correspondents in other companies. In addition to some clear policies about getting rid of old email messages, you need to have some clear understanding about the use of email by employees. High on the list of an email policy statement would be an absolute prohibition against ever sending any email to anyone that is critical of someone else -- whether an employee, boss, competitor or even a competing product. Libelous statements can come back to haunt you later. Also, employees must be educated to understand that email is basically like putting a message on a public billboard that will remain there for decades. It is not private. Offbeat "humor" that can be taken as racist or harassing is also an invitation to a lawsuit by an employee. Using email to propagate personal web graphics and humor is also a potential land mine for litigation.

J. Richard Duke:

• Jyske Bank's Investment Seminars 2000, Zurich, Switzerland, September 27-October 1, 2000.
• Banque SCS Alliance Conference, Higher net-worth individuals, Nov.11-12, 2000, Nassau, Bahamas.
• Primeglobal Asset Protection Summit, November 13, 2000, Boca Raton, Florida and New York, New York, November 15, 2000.
• Argon Limited seminar, August 8 and 9, 2000

• Primeglobal asset protection summit, November 13, 2000, Boca Raton, Florida and New York, New York, November 15, 2000.

Vernon K. Jacobs