You have worked hard all your life to build up your wealth. The last thing you need is for someone to file a lawsuit that strips away everything you’ve earned. Sadly, this tragic but preventable outcome happens to thousands of people every year. If only those people had known that they needed an asset protection strategy for lawsuits, they could have kept their wealth intact.
While you’re already likely taking measures to avoid lawsuits, it’s important to have a backup plan in place. All it takes is one small error, such as getting into a car accident, to begin a lawsuit that turns your life upside down. That’s why we’re going to show you how to protect assets from lawsuits using a variety of tools:
- Insurance — Good but Not Good Enough
- Business Entities Can Limit Your Overall Liability
- Trusts: The Best Asset Protection Strategy for Lawsuits
- Retirement Funds Offer Security — If You’re Patient
- Asset Protection Strategy for Lawsuits FAQ
Strategy #1: Insurance — Good but Not Good Enough
An excellent insurance plan is part of any asset protection strategy for lawsuits. As asset protection measures go, an insurance policy is one of the cheapest and simplest tools you can set up. The primary value of a good insurance policy isn’t that it protects you during a lawsuit but that it can prevent one from happening.
Consider the following scenario: You’re driving on the freeway when traffic suddenly grinds to a halt as you’re briefly looking over your shoulder to make a lane change. You try to brake, but you’re ultimately not fast enough and rear-end the car in front of you pretty hard. If you have a good insurance policy, your coverage should be able to pay for any medical bills that the other driver incurs, as well as any damage to their car. If you have bare-minimum coverage, your policy might not cover every single damage, which would incentivize the other driver to go after your personal wealth. By simply having a policy with top-tier coverage, you drastically reduce the chance that your personal assets will be put at risk by an honest accident.
However, insurance policies have dozens of flaws that make them a less-than-comprehensive asset protection strategy for lawsuits. Notably, coverage amounts are always limited at some point. If you are sued for more than your coverage, your insurance will leave you to foot the remainder of the bill. Additionally, you can’t always count on your insurance to do what you expect. Policies are complex legal documents, and if your insurer can find a way to deny coverage, they probably will.
Ultimately, you need to have an insurance policy. However, you should keep in mind that this is the bare-minimum amount of asset protection you’ll need, not the whole strategy.
Strategy #2: Business Entities
If you own a business, you must use appropriate business entities to run each company. Selecting the right entity type limits your overall liability, preventing business lawsuits from impacting your personal assets.
To get the protection you need, it’s important to select the correct business structure. Here’s a brief overview of commonly used structures and whether to include them as part of your asset protection strategy for lawsuits:
Sole Proprietorships
A sole proprietorship offers absolutely no asset protection. In this business structure, both you and your business are considered the same entity. If you get sued, both your personal andbusiness assets may be at risk.
Partnerships
If a sole proprietorship offers no asset protection, then a partnership puts your wealth in active jeopardy. Like a sole proprietorship, a partnership does not create a strong legal distinction between you and your company, allowing lawsuits to affect both partners. On top of that, partnerships introduce a second party into the business, which adds unpredictability and risk.
In a sole proprietorship, you have complete control over the company and its actions. That means you only have to worry about the choices and mistakes that you personally make. But with a partnership, you now need to worry about the actions of your partner. If they make a mistake that causes a lawsuit, the creditor can access your assets as well, even if you were not responsible for the decision that led to the case.
Finally, partnerships have a habit of falling apart, which creates a new set of legal risks. Much like a divorce, dissolving a business partnership often requires untangling assets and obligations one piece at a time. This process often kicks off secondary lawsuits where your former associate sues for damages or demands certain assets that should rightfully be yours.
Corporations
A corporation such as a C-Corp or S-Corp is an effective business entity for asset protection. It limits the liability you face by ensuring that any lawsuit against the company can only impact company-held assets and not the personal wealth of anyone running the corporation.
However, both S-Corps and C-Corps have some notable drawbacks that keep them from being part of an effective asset protection strategy for lawsuits. Specifically, they’re complex to manage, involve numerous parties, and have significant compliance burdens. If your business is very large, then a C-Corp or S-Corp may be a good fit for you. However, if you are the sole member of your business, there’s another corporate structure that may better suit your needs.
LLCs
When setting up an asset protection strategy for lawsuits, the most effective corporate structure is often a limited liability company (LLC). This business designation is simple to manage, easy to keep compliant, and clearly separates personal and professional assets.
Because LLCs are easy to set up, you can also use them to keep assets in different buckets. For example, if you own several rental properties, each one can belong to a different LLC. That way, if one company gets sued, only one building is at risk, rather than every property you own.
An LLC can be established in a variety of jurisdictions, including overseas locations like Nevis and the Cook Islands. This flexibility makes it easy to incorporate an LLC into an asset protection strategy that utilizes offshore asset protection trusts (OAPTs). Given that OAPTs are the single most effective asset protection strategy for lawsuits, an LLC is almost always going to be the best corporate structure for keeping your wealth safe.
Strategy #3: Trusts: The Best Asset Protection Strategy for Lawsuits
To truly protect your assets from lawsuits, you need to establish an offshore asset protection trust. These structures are established in overseas jurisdictions and placed under the care of a trustee who manages the assets inside the trust. The trustee is beholden to the rules you and your asset protection planner laid out in the trust agreement.
The reason offshore asset protection trusts are so effective against lawsuits is twofold. First, the trust is irrevocable. This means that once the settlor creates the trust, they do not manage its assets and cannot make changes without trustee approval. Because the trust cannot easily be altered by its creator, the assets inside it are no longer considered to be the settlor’s. The unalterability of these trusts is also useful when a creditor wins a lawsuit against you. If the creditor requests that you hand over any assets in the trust, you cannot simply remove them at will and must get trustee approval. At that point, the trustee will refuse to send your assets, as many OAPTs have provisions against surrendering assets that someone requests while under duress.
Second, and most importantly, OAPTs are immune to foreign judgments. If a creditor takes the ruling from a U.S. judge to your trustee, the trustee will turn them away. The only way a creditor could have that judgment fulfilled would be to lodge a fraudulent conveyance claim against you in the courts where your OAPT is established. This process is costly and unlikely to result in a favorable ruling for your creditor, so most creditors won’t even bother trying.
Strategy #4: Retirement Funds Offer Security — If You’re Patient
Lastly, you can get some asset protection from lawsuits using a retirement fund. These funds are well protected against lawsuits in most states, so even if you lose a lawsuit, your creditor cannot access the money in your account. The only disadvantage of retirement funds is that many of them require you to wait a certain period to remove funds without incurring an additional tax penalty.
Let Us Create Your Asset Protection Strategy for Lawsuits
The final and most important step of safeguarding your wealth is to work with someone who actually knows how to protect assets from lawsuits. The team at Asset Protection Planners has spent decades creating strong offshore asset protection trusts, and we’ll set up a strategy that can keep your money safe from creditors. In fact, we’ve established hundreds of Cook Islands trusts and not one has been breached by a creditor.
Don’t wait around for a lawsuit to start. The sooner you establish your asset protection strategy, the more effective it will be at safeguarding your wealth. Schedule a free consultation to start setting up your strategy today.
