I almost feel sorry from Navinder Singh Sarao. If you don’t recognize the name, you’ll probably remember what he did. He’s the UK-based trader accused of causing the “flash crash” in 2010 that temporarily erased almost $1 trillion from US stock values.
Last November, Sarao pleaded guilty in US federal court to wire fraud and illegal market manipulation. (Incidentally, it’s quite likely that he’s innocent of the charges he pled to, although that’s an entirely different story.)
Sarao was a master trader who in a good week could clear £500,000, at the time equal to more than $700,000. Yet, he was unable to come up with $750,000 bond pending his sentencing. His family had to put up their homes to cover it.
It turns out that most of Sarao’s wealth disappeared into a maze of offshore investments and trusts designed to save on UK taxes. Between 2009 and 2015, he invested in a series of complex schemes he was promised would greatly reduce his tax bill. By 2016, when Sarao realized he couldn’t get the funds back, he actually agreed to allow the US government to track it down for him.
What went wrong? Sarao is reputed to be an incredibly gifted trader, but also incredibly naïve. He evidently trusted the promises of glib salesmen, but lost it all when the investments he made went south or went into the pockets of his advisors.
Trusting people who aren’t worthy of your trust isn’t the only stupid asset protection trick I’ve encountered. Here are a few that I’ve encountered over the years:
- Putting your money in your spouse’s name. In some states, this strategy can be effective in protecting your assets, but there are numerous drawbacks.The most obvious one is divorce. If your spouse decides one day to leave for greener pastures, those assets could be gone for good.There’s also the concept of “fraudulent transfer” (also called “fraudulent conveyance”). In a lawsuit, courts carefully examine asset transfers between relatives, especially if they occur when litigation is imminent or has already started. A court has the authority to order your spouse or anyone to whom you’ve made an apparent gift to return it.And what happens if your spouse gets sued? This occurred with one of my clients, a surgeon who paid malpractice premiums of hundreds of thousands of dollars annually. For extra protection (he thought), he transferred most of his wealth to his wife.It didn’t work. One day, while driving home from the country club after a few cocktails, the wife hit a teenager on a bicycle, badly injuring him. The family sued, and the claim exceeded the limits of her liability insurance. (We had recommended hiking these limits as well, but my client hadn’t gotten around to it.) She wound up writing a $1 million check to the boy’s parents out of my client’s assets.
- Not making full disclosure in a bankruptcy case. If you file for bankruptcy or are forced into it, the payoff is that a court will discharge, or at least restructure, your debts. But before it does so, you must make a full disclosure of your financial condition.How will anyone know if you don’t? There are many “breadcrumbs” an experienced bankruptcy trustee can follow: your tax returns, property records, and (especially) disgruntled business partners, ex-spouses, etc.Former baseball star Lenny Dykstra learned this the hard way. He failed to disclose some items worth more than $200,000, including a collection of baseball memorabilia, on a bankruptcy petition. He served more than a year in prison as a result.
- Creating a “constitutional trust.” Also known as a “pure trust,” “colato,” or a “common law trust,” a better name for it would be “con-man trust.” Promoters claim this instrument will be completely exempt from all taxes. And they’re right – the trust won’t owe any tax, because the IRS doesn’t recognize it as a legitimate legal entity. Instead, you owe the tax, and if you don’t pay it, the IRS will be happy to collect it from you.I first learned of this type of trust more than 25 years ago. At cocktails after a session at a firing range practicing my marksmanship, one of my friends casually mentioned he had just created a trust that would allow him to never pay tax again. I asked him if he could give me the name of his lawyer.“My lawyer refused to create one for me,” he told me. “He said it was a scam, but the truth is that the Rockefellers and other wealthy families have been using these trusts for years.”My friend gave me the name of someone named George Henderson. For reasons I no longer recall, I never contacted him. But a few years later, I learned Henderson had been sentenced to prison for helping his clients evade at least $13.8 million in federal income tax.
In all these situations, the end result is always the same. Either the technique backfires, or the person promoting it earns a hefty commission and the client who takes his advice gets screwed.
Fortunately, there are alternatives. If you’re serious about protecting your assets or saving on taxes, consult an expert before engaging in “do-it-yourself” asset protection or trusting a promoter.
Don’t be the next victim of a stupid asset protection trick.
Reprinted with permission from Nestmann.com.