If you’re a successful businessperson, a wealthy investor, or someone working in a high-risk field, you’ve probably wondered what assets you can lose in a lawsuit. And if you’ve researched the risks lawsuits pose, you’ve unfortunately seen that almost any asset can be lost to a creditor.
However, there is good news. There are ways to protect virtually every asset that lawsuits threaten. In this article, we’ll explain exactly which assets you can lose in a lawsuit and introduce you to tools that can safeguard against that outcome.
- Why Can You Lose Assets in a Lawsuit?
- Assets You Can Lose in a Lawsuit
- What Assets Are Protected From Lawsuits?
- Tools Used to Protect Assets From Lawsuits
Why Can You Lose Assets in a Lawsuit?
Civil lawsuits, which are the kind where you can lose assets, are intended to provide financial compensation to someone who suffered damages due to another person’s or entity’s actions. So, you can lose your assets in a lawsuit when someone claims that you have wronged them in some way.
While these sorts of lawsuits were initially intended to provide victims with a way to recover much-needed compensation, civil cases have spiraled out of control. What once served to help people pay for medical bills and hold criminals financially accountable has now become a multibillion-dollar industry for lawyers.
To make matters worse, many lawyers who file civil claims take work on a contingency fee basis, meaning that they are paid a percentage of the final settlement or court judgment. This model compels attorneys to push settlements far past what is reasonable and encourages plaintiffs to file frivolous lawsuits for matters that should be handled by insurance.
Additionally, civil lawsuits in the United States aren’t subject to the same burden of proof as a criminal case. Crimes must be proven beyond a reasonable doubt and are judged by a jury of 12 people who must unanimously reach a verdict. Civil claims, however, are subject to a burden of proof known as a “preponderance of evidence.” In essence, all the plaintiff must show is that it is more likely than not that the defendant’s actions resulted in damages—only the judge needs to agree with their claim.
Ultimately, civil lawsuits pose a threat to anyone, regardless of how many assets they own. And because lawyers are incentivized to push for larger settlements during a lawsuit, everything you have is at risk.
Assets You Can Lose in a Lawsuit
Unfortunately, most of your assets are fair game to creditors who win a court case against you. Here’s a non-exhaustive list of the assets you can lose in a lawsuit:
- Liquid assets (cash, savings, checking accounts, etc.)
- Investments (stocks, bonds, investment accounts, etc.)
- Vehicles
- Real estate
- Miscellaneous personal property (jewelry, valuable collectibles, etc.)
- Business assets
What Assets Are Protected From Lawsuits?
While a majority of your assets can be lost during a lawsuit, some enjoy protections from creditors, such as:
- Some retirement accounts
- Government benefits (social security and disability)
- Certain annuities
- Primary residences (in some cases)
As you can see, the amount of assets that are protected pales in comparison to what you can lose in a lawsuit. Plus, much of what is safeguarded from lawsuits is subject to certain exceptions. For example, 401(k)s are safeguarded against lawsuits, while IRAs have protection that varies from state to state. Similarly, some states have homestead exemptions that protect primary residences, while other states allow creditors to seize a defendant’s home.
Tools Used to Protect Assets From Lawsuits
Given the small number of assets that are safe from lawsuits, you need to have other safeguards in place to defend against creditors. Thankfully, various asset protection tools can be used to limit the impact of lawsuits:
- Asset protection trusts (APTs): Asset protection trusts can be established either in the United States (domestic asset protection trust/DAPT) or overseas (offshore asset protection trust/OAPT). These tools put a legal barrier between creditors and anything you place in the trust. In these trust structures, anything inside the trust falls under the management of a trustee, who is obligated to keep those assets safe. When an APT is set up by a professional, a creditor’s attempts to claim any trust-held assets will be denied by the trustee. It’s important to note, however, that OAPTs have far stronger protections against lawsuits than domestic trusts.
- Land trusts: Land trusts protect real estate from creditors by removing your name from public ownership records. This makes it far more difficult for a lawyer or creditor to link you to the real estate that you hold. Because many lawyers perform asset searches to confirm that a defendant has enough assets to be worth suing, a well-crafted land trust can greatly reduce the likelihood of a lawsuit.
- Limited liability companies (LLCs): LLCs separate your business holdings from your personal possessions. When someone files a lawsuit against an LLC, that claim is solely against the company, and not any members. At the same time, if an LLC member is sued, the claim will not impact the company’s assets. This division of assets makes LLCs an excellent choice for limiting the damage caused by any single claim. Many people even use multiple LLCs to keep their liability spread across several entities. However, anyone who uses an LLC to protect their assets from lawsuits needs to be careful about keeping personal and business expenses separate. Using personal funds for business purposes, or vice versa, opens the door for creditors to nullify the protections of the LLC.
- Equity stripping: Equity stripping makes it possible to place the value of real estate assets into an offshore trust. In simple terms, this process places a mortgage against a property you own, effectively removing most of the equity you have in the property. That mortgage is then made payable to an offshore LLC inside of an OAPT you’ve created. At this point, any mortgage payments you make are transferred to the offshore LLC, and the value of the home is contained inside the offshore trust. If a creditor attempts to claim a piece of real estate that has undergone equity stripping, they’ll find that you have no equity in the property, making it impossible for them to force a sale.
Keep in mind that when you work with an asset protection planner, they’ll often recommend using these tools in conjunction with one another. For instance, adding an offshore LLC to an OAPT can enhance the protection you get from lawsuits and give you more influence over the items in the trust.
Protect Your Assets From Lawsuits With Help From Asset Protection Planners
Given that there are few limits on what you can lose in a lawsuit, an asset protection plan is a must-have for anyone who could be sued. Fortunately, the team at Asset Protection Planners makes it easy to set up an ironclad wealth defense strategy.
Schedule a free consultation today to learn how we can protect your assets from lawsuits and creditors.
