Most people work hard all their lives in order to accumulate wealth or build a legacy to leave to their heirs. In an instant a lawsuit can wipe out all of that hard work. According to ZeroHedge.com, someone files a lawsuit in America every 2 seconds. That’s 1 lawsuit for every 12 adults, according to the site. So in this article we cover five legal tools to protect assets from lawsuits.
Before we discuss the legal tools we must realize that we at risk. Moreover, certain types of business owners or professionals are at a higher risk of lawsuits than others. Here are some of the at-risk professionals who should definitely consider an asset protection strategy.
- Did you know that dentists face a disproportionate amount of lawsuits? It’s true, and according to the Bureau of Justice, 39 percent of lawsuits filed against dentists are successful. The average award is $53,000. But 21 percent of those awards are more than $250,000.
- Real Estate Agents. Lawsuits against Realtors continue to rise. The National Board of Realtors says that only 25 percent of those filed are successful. Nevertheless, they still must pay legal fees. When you consider the trend, it’s still important for Realtors to protect their assets.
- Medical doctors are also at risk of lawsuits as patients file medical malpractice suits at an alarming rate. And another report by the Bureau of Justice found that plaintiffs won those suits more than 50 percent of the time. The medium award was between $400,000 – $631,000. This depends on whether it was a jury or bench trial; the bench trials resulting in the higher awards.
Related content: 5 Ways to Protect Assets from Lawsuits
Legal Tools to Protect Assets from Lawsuits
Knowing this, it only makes sense to protect your assets. You don’t want a lawsuit to shatter all your dreams for the future and wipe out the wealth you’ve built.
And luckily, with some strategic planning and an asset protection expert at your side, you can take some legal steps to protect your wealth. In fact, asset protection advisors in this company rely primarily on five legal tools to help clients do just that.
1. Land Trust
If you’re like many Americans, real estate is your biggest asset. But unless you live in one of the six states that forbid creditors from taking your personal residence, your house is at risk. No states protect investment real estate. So, your remaining real estate assets are at risk no matter where you live. If you want to keep your ownership private, you should learn about land trusts. These trusts are both for owners of a single home and real estate investors with many properties.
Land trusts act as a privacy shield rather than a tool to protect assets. So, the trust acts as a vehicle that holds title to your real property confidentially. It allows your or your LLC to be the beneficiary and to direct the property’s management. A land trust will help limit exposure to contingent fee attorneys. The reason is, when they do an asset search you look poorer than you really are. It may also help your heirs avoid probate, and provide you with the privacy that is helpful in lawsuit prevention.
It is generally wise to use the land trust in conjunction with an asset protection and lawsuit protection tool, such as an LLC. The LLC will be the beneficiary of the land trust for rental property. Thus, next we discuss the LLC.
The LLC, or limited liability company, is the most popular tool for holding real estate. Experts also recommend them as asset protection tools to hold stock market investment portfolios. Many use them to operate businesses. The LLC has the asset protection benefits of limited partnership. When someone sues the owner, there are provisions in the law to keep a creditor from taking that member’s interest in the LLC. Plus, when an attorney sues a business, the LLC acts as a legal shield. It can keep the judgment from taking the member’s and manager’s personal assets.
In the past a one-member Limited Liability Company (LLC) was an excellent way to protect assets. The law prohibited judgement creditors from seizing a member’s interest, whether it was a single member or multi-member LLC. But in 2010, the law began changing in states like California, New Mexico, Florida and others and it’s now possible for creditors to seize the membership interests unless it has two or more members. So, states such as Nevada, Wyoming and Delaware changed their statutes offering protection to single-member LLCs.
Savvy asset protection experts have changed the way they use this valuable tool in many states. Instead of simply placing the real estate investment or other risky asset into the LLC, it’s now smarter to place membership interests into a protective trust. Once you do this, an LLC is still one of the best vehicles for risky assets. For example, it is ideal for holding as real estate investment properties.
In addition to LLC’s, corporations can help protect the owner’s assets. For example, an S Corporation or a C Corporation can offer great benefits as long as it meets certain conditions. If you’re considering using a corporation to shield your assets, keep these 3 issues in mind:
- A corporation is a great tool for protecting personal assets. It works as a limited liability tool for its shareholders, directors, and officers. That means it will protect your assets from collectors of corporate debts. It can shield against personal injury claims caused by the corporation or its employees. Likewise, it is a barrier to breach of contract judgements like those that many business owners experience.
- While a corporation is an excellent asset shield for many types of businesses, it won’t protect the assets of personal service providers. It cannot provide professional liability protection for as medical doctors, dentists, financial consultants, and accountants. This is even the case if they work for the corporation. It can, however, offer a shield from non-professional employee liability. Did a secretary hit someone when picking up your lunch? A corporation can help.
- In order for a corporation to truly protect assets, it must carry itself as a distinct and separate entity from its principals. If it doesn’t, a creditor can pierce the corporate veil, and attach judgements and liens to the principals.
4. Equity Stripping
If you have valuable assets, creditors will look to them in order to collect judgements or liens. There is one common asset protection strategy that enables you to continue utilizing those assets while making it difficult or impossible for creditors to access them. We call it “equity stripping,” and it does exactly what it sounds like. The idea behind the method is to strip your assets of any equity. Thus, there is little incentive for creditors to come after them.
We typically do this by attaching liens to the property that reduce the amount of equity. For example, if you own investment properties, you can take out a second mortgage or a HELOC that reduces the amount of equity in the property. This asset protection tool has many uses. We also use a similar lien structure for things like accounts receivable and valuable office equipment. Alternatively, you can set up a privately-owned LLC that records mortgages or deeds of trust against all of your real estate. Then when the “bad thing” happens, there are international institutions who will acquire the loans and distribute the cash. One then places the resultant cash into the next legal tool, the offshore asset protection trust.
5. Offshore Trust
Finally, an offshore asset protection trust is another tool under the belt of asset protection experts. These trusts operate in much the same way as US trusts, but the trustee is not a US citizen. In fact, for these trusts to stand up in court, the trustee should not be a resident of the US. Thus he will not be obligated to follow US court orders. With a US trust, the US trustee would have to hand over the control of the trust to the courts if so ordered.
The offshore trustee, on the other hand, is not subject to the court order and would be willing to fight to protect the assets. Obviously, this type of asset protection tool is best set up by an expert with the knowledge and experience to do it right. It is ideal to establish one before someone sues you. We have, however, seen work repeatedly after a lawsuit is filed.
This organization has established hundreds of offshore asset protection trusts and have not seen clients lose assets when established properly. They are as close to bulletproof as we have seen. So, there is one big reason why they are used frequently – they work.
Asset Protection Conclusion
Asset protection is an integral part of keeping your assets safe from creditors, but it’s important that whatever method you use is structured correctly. And considering that the cost of litigation in a lawsuit can reach $150,000 according to the Small Business Administration (SBA), you should do all you can to protect your business, assets, and the wealth that you’ve worked so hard to build. There are legal tools that were created to do just that. The bottom line is that knowing this information alone will not help. You actually need to contact an expert an establish the legal tools. There are numbers and a form on this page in order to get additional support or to take the needed action.