Bulletproof Asset Protection
According to the Bureau of Justice Statistics there are over one million lawsuits and judgments filed every year in the US, making America the most litigious country in the world. In fact, with just 4.4% of the world’s population, the US has 96% of the world’s lawsuits. So, bulletproof asset protection, that is, knowing that if you are the next victim of these statistics, what you worked hard to earn will be safe and secure.
Lawsuits begin when efforts to solve conflicts outside of the courtroom are unsuccessful. There are various reasons plaintiffs and defendants fail to compromise. Once the fireworks start, legal fees and court costs mean that both sides start digging a financial hole for themselves and the risk of loss for each party increases.
The legal process of complaint-to-settlement costs tens of millions of dollars, which in some cases results in financial annihilation. Most law advisors agree that mitigating loss from legal battles begins with bulletproofing assets, so having a developed tactical and pragmatic plan is essential.
“A successful ‘law-suit’ is the one worn by a policeman.”
Protecting Assets Before a Complaint
Forbes contributor, Robert Pagliarini writes that “lawsuits aren’t filed against those with few assets; they are filed against those with ‘deep pockets’.”
Although many of us attempt to protect our possessions from loss by avoiding high-risk behaviors, clashes with others and/or being careful to prevent conflicts; torts that trigger lawsuits occur anyway. No matter how vigilant a person is, there is always the chance of being sued because, let’s face it, disagreements do happen.
Ensuring that assets are bulletproof to loss by lawsuits and judgments prior to an accident happening begins with knowing what steps to take.
One of the most common, and typically the first step to take in the line of defense of litigation is procuring insurance. Some of the most valuable assets that can and should be covered by insurance include life, health, home and auto. That is the first step, but much more must be done.
Insurance Is Not Enough
Legal analysts suggest that to protect assets from major claims and lawsuits, having extra liability insurance coverage in home and auto policies called umbrella liability coverage is wise in defense of major loss.
Pagliarini suggests that an umbrella liability policy should be in the amount of “at least equal to your net-worth.” For example, if your net-worth is estimated at $1 million, you should purchase a $1 million umbrella liability policy.
Farmers Insurance explains umbrella insurance as an extension to current liability limits. For instance, if you’re liable and the costs to cover any damages and injuries is $1 million but the current liability limits of your policy is $750,000, there would obviously be an uncovered amount of $250,000. This amount is called “out of pocket expenses.”
With the purchase of an umbrella policy, an extension to your policy’s liability limits beyond the maximum provided would cover the difference.
When assets are bulletproofed by a well thought out plan, like insurance, there is less to lose.
Whereas insurance is good to have, it is not nearly enough. First, the exceptions written in today’s insurance policies arise from pressure to keep rates down. “Believe me, my company will do anything they can to squirm out of paying a claim,” said one insurance industry professional we asked. “Your policy doesn’t cover that,” is a common phrase echoing in the minds of many potential claimants who have faithfully paid their premiums. Heaped on top of that is the glaring fact that many lawsuits far surpass insurance limits.
So, if insurance isn’t enough what can you do?
“You can’t predict. But, you can prepare.”
It’s What You Keep
When assets like accounts, cash, cars, homes, investment properties, or income is lost, it affects your lifestyle and security. The personal ramifications may be catastrophic for individuals, families, and business owners.
But, lawsuits and judgments are an everyday threat to personal and business assets as well as financial well-being.
Entrepreneur and venture capitalist Mark Suster says lawsuits are on the rise and says, “There’s much money at stake and founders have been conditioned that suing is ok.”
Are you an entrepreneur? In the event you are, and you own your own business, it’s important that personal assets are kept separate from business assets. And, as an entrepreneur, you’re tasked to know the solutions to how to keep what you’ve built.
A Few Assets Are Protected by State and Federal Law
Did you know that there are certain assets legally protected from loss in lawsuits? Federal and state laws determine what type of protection most of your assets have from creditors and judgments. These laws protect owners of corporations, limited partners of limited partnerships (LPs) and members of limited liability companies (LLCs) from lawsuits against the entities.
Jay Tarshis, head of trusts and estates practice group at Arnstein & Lehr’s Chicago office says real estate and other assets can be protected by owning them in separate limited liability companies.
“It puts up a firewall around that entity. It’s like building a wall around you and your assets. You could have a very tall wall, which could be protective but expensive and very difficult to live with—or, recognizing that the real threat may be fairly remote, you may sleep just fine with a shorter wall.”
Tarshis also suggests that life insurance is sometimes exempt from loss in lawsuits. Some people may place life insurance in an insurance trust. What’s important to note is that the designation in a trust must be completed prior to complaints that end in lawsuit or judgment.
“Life insurance payable to a spouse or child tends to be protected, but it may not be if it’s payable to someone else, so you have to look at state law—is it blanket protection or something else?
Do yourself a favor, find out your state’s asset protection laws by visiting the state’s official website in which you reside and/or do business.
“To us entrepreneurs, our businesses are our babies. We do everything we need to do to ensure our baby arrives safely and has a healthy existence. In many cases, however, we get so wrapped up in coddling that baby that we forget to take care of our own future.”
One of the most noted assets that are federally protected from loss in lawsuits are qualified pension and profit-sharing plans including retirement plans like 401(k). These are covered by legislation known as the Employee Retirement Income Security Act of 1974, or ERISA. If funds from the qualified account are rolled over into an IRA, the ERISA protections extend to the rollover.
Bulletproof Asset Protection Plans
For entrepreneurs, self-employed individuals or those who run small businesses, there is a major risk that business issues could pose a threats to personal assets. To deflect these type risks, you might choose to operate the business as an S corporation or a limited-liability company (LLC). Law experts and asset planners suggest that an LLC is the best option to lessen asset loss because, as Jeffrey Verdon, a lawyer in Newport Beach, Calif says, “Operating under an S corporation or LLC is the better bet because it’s harder for creditors to take your share of the business to satisfy a personal debt.”
Not only can your business be sued, but you could be sued personally. An LLC can protect you either way. With an LLC, there are legal provisions such that when the company is sued, the owners (members) can be shielded from personal liability. On the other hand, when a member of an LLC is sued personally, such as an automobile injury lawsuit with damages that exceed insurance limits, the LLC can also offer protection. That is, when an LLC member is under legal attack, that member’s interest in the LLC plus the assets inside of the LLC can be shielded from being taken away from that member.
Moreover, for those business-for-self individuals who have significant assets or for physicians, real-estate developers and any other professionals who tend to attract lawsuits, attorneys strongly suggest establishing an Asset-Protection Trust. This tends to be the strongest legal tool to shield liquid assets, especially when utilizing an offshore trust where the trustee resides beyond the reach of local courts.
These types of trusts are irrevocable, or irreversible, indicating that, when properly drafted, the courts can’t force you to make changes that would allow them to seize trust assets. Instead, allocations are decided by a trustee who could stop payouts if there were a legal judgment against you. This makes these types of trusts one of the most results-oriented bulletproof asset protection tools available today.
Some individuals may believe that physicians, corporate executive and other litigation-prone business owners are the only professionals who need to protect their assets. This is not true. As stated before, accidents and unintentional circumstances happen every day under which assets can be attached or garnished from lawsuits and judgments. These occurrences include civil suits, divorce, or forced or voluntary bankruptcy. Lawsuit claims that surpass the limits of insurance policies are daily occurrences.
“If you count all your assets [including gratitude, life, loved ones] you will always show a profit.”
Simple Ways to Bulletproof Assets
Asset protection is easy compared to the alternative. What makes asset protection complex is typically the failure to protect your assets prior to complaints made against you. Some people fail to research and implement asset-protection plans because of lack of understanding or cost perceptions. But, there are some inexpensive, less complex approaches to protect assets that anyone can easily implement:
- One or more corporations or LLCs to operate businesses.
- A separate LLC for each real estate investment.
- An LLC to hold safe assets such as savings accounts and stock portfolios.
- Asset protection trust for substantial liquid assets, especially an offshore trust.
- An Employer-sponsored retirement plan.
- Umbrella policies that protect from personal-injury claims beyond the standard coverage of home and auto policies.
- Taking advantage of resident state’s laws regarding homestead exemptions, annuities and life insurance. (Did you know that, in some states, paying down a mortgage can protect cash that is otherwise vulnerable?)
- Never mix business assets with personal ones. This means that if your company is subject to litigation, personal assets might not be at risk and vise-versa.
What Does This All Mean?
Most legal authorities and asset protection professionals agree about the biggest mistake many people make. It is waiting until it is too late before protecting personal and business assets.
It is vital in today’s litigious environment that individuals and business owners plan ahead. They must plan and act when, in the parlance of asset protection lawyers, “the waters are calm.” Assets transferred after the threatening event is known may be set aside as fraudulent conveyances. When you have been sued, or threatened with suit, it is too late. Today is the day for asset protection.
“Avoid lawsuits beyond all things; they pervert your conscience, impair your health, and dissipate your property.”
Jean de la Bruyere, French Philosopher
A Final Note
As stated at the beginning of this article, the number of lawsuits, judgments and legal actions that are filed, argued, and settled every day in the United States continues to grow on such a large scale that it is beyond funny for all those involved.
The moral: Set up a bulletproof asset protection plan now before it’s too late.
Set up the proper legal tools so that your assets are bulletproofed from lawsuits and judgments, before the next lawsuit strikes. You worked hard for your money, so you want to make sure that whoever tries to take it away from you has to work much harder.
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Susan Oliver Nelson, Author, Businessperson, Member of Veteran Owned Businesses