The Panama Papers are an unprecedented leak of 11.5 million files from the database of the world’s fourth largest offshore law firm, Mossack Fonseca. Among the revelations within the leaked database is that twelve national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore creditor and tax havens.

With the added intrigue of tax havens, politicians, and the rich and famous, the current Panama Papers situation reminds us that many people (wealthy or otherwise) use mostly legal shelters to protect their assets. From a historical point of view, the leak should be viewed less as evidence of recent sea change and more as the modern manifestation of a well-established practice. In fact, the novelty illustrated by the Panama Papers may be the globalization or standardization of the tools used for asset protection by the wealthy across the globe. As observed by Crawford Spencer, a professor of accounting from the Warwick Business School in the U.K. in a recent article on the Panama Papers, “That the global elite ensconce their money in offshore tax havens and byzantine corporate structures is nothing new. However, these latest revelations… are novel in that they show how elites from different walks of life come together in order to avoid scrutiny of their affairs by state authorities and the public more broadly.” Not only is the behavior of today’s wealthy in seeking out protection of their assets nothing new, Panama’s use of asset protection as a means of recruiting investment within its borders is nothing new.
In fact, Texas residents don’t need to seek out exotic locals or foreign lands to find historical evidence of the use of asset protection to attract investment and settlement. Most readers are likely aware that your “homestead,” the house and land you intend to occupy as your main home, are exempt from creditor’s claims. In Texas, up to 10 acres of an urban family home, plus improvements, and up to 200 acres in rural areas — except for single adults, who are limited to 100 acres — are exempt from the claims of general creditors. What you may not be aware of is why Texans enjoy such generous homestead protections.

Many Americans who settled Texas in the early nineteenth century were pursued by their creditors, and for their protection Stephen F. Austin recommended a moratorium on the collection of the colonists’ foreign debts. In response to that recommendation, the legislature of Coahuila and Texas enacted Decree No. 70 of 1829 to exempt from creditors’ claims lands received from the sovereign as well as certain movable property. Although that act was repealed in 1831, the principle remained alive in Texans’ minds and was a model for the Texas Act of 1839, which protected the home of a family from seizure by a creditor. This was the first law of this sort, and the principle of homestead exemption is therefore deemed Texas’s particular contribution to American jurisprudence. The homestead principle was embodied in the Texas Constitution of 1845 and all constitutions thereafter. In other words, Texas was a forerunner of Panama as being an innovator in creating the legal protection of assets from creditors.

Even if you didn’t know the history of the homestead protection, it is easy to see history’s influence in some of our State’s personal property exemptions. Today, personal property with a fair market value of no more than $60,000 for a family and $30,000 for a single adult is protected. This includes horses, up to twelve head of cattle, and (of course) two guns. Other personal property that creditors can’t seize from Texans include your car, farming or ranching vehicles, clothes, pets, and athletic and sporting equipment, including bicycles. In addition to horses and twelve head of cattle, two mules or donkeys, and a saddle, blanket and bridle for each are exempt.

This early legacy of asset protection in Texas has not waned. Led by the famous homestead exemption, our debtor-friendly state shelters the most significant parts of an average family’s wealth from creditors. Much as it was in 1845, the Texas Constitution continues to be the foundation for protection of debtors from creditor actions. For instance, the Texas Constitution does not cap the value of the homestead exemption. The Texas exemption is done by the area of land, so it doesn’t matter how expensive it is. If your 200 acres is worth $2 million or $200,000, it doesn’t matter. You still get your 200 acres.

Although legal protection from creditor’s claims goes all the way back to Texas’s early recruitment of settlers, today Texans enjoy protection of many modern classes of assets. For example, in general, IRAs, 401(k)s, traditional pension plans, profit-sharing plans, annuities, and life insurance proceeds are protected from creditors. Also protected are college savings plans, such as 529 plans, and prepaid tuition plans.

Whether or not we choose to be proud of Texas’s singular contribution of the Homestead exemption to American jurisprudence, or are disappointed by what we have learned from the Panama Paper’s leaks, knowledge of our own Texas history can help us keep today’s global events in perspective and allow us to at least acknowledge that the impulse to protect what we claim as our own is part of the human condition.

Advertisements