1. If your assets are adequately protected, you will not be an attractive target for lawyers who are contemplating suing you on a contingent fee arrangement for an indigent plaintiff. 

2. If you do get sued and lose, your asset protection plan should allow you to start over with some money that is beyond the reach of potential creditors. 

The "Paradox of Insurance" is that the more insurance you have, the more attractive you are to potential plaintiffs and their lawyers. The best lawyers who work on a contingent fee arrangement use investigators to find out how much insurance and/or assets you have before they will agree to take a case on a contingent fee basis. 

If they don't find any at first, they may just look harder. But if it's obvious that it will be harder to get your assets than to win the case, the lawyer will often require the plaintiff to pay cash in advance for a large part of the legal fees. Unless the plaintiff has a deep pocket, that is often the end of a potential lawsuit. 

A well designed asset protection strategy will make it possible for you to start over if you are sued and lose the case. Some legal advisors claim that the "best" form of asset protection is to put all of your money into a family limited partnership and to transfer your partnership interest to a foreign situs asset protection trust. William Comer, author of Freedom, Asset Protection & You says that this device has proven to be impenetrable "to date", when implemented by qualified and experienced legal advisors. 

However, another experienced advisor argues that you shouldn't remove more than 30% to 40% of your assets from potential creditors; because if they can get a sizable judgment, they are far more willing to write off the rest and leave you alone. If you remove all of your assets from access by creditors, they may decide to spend the time and money to get it all - at any cost. Offshore Asset Protection Trusts are one of the more controversial parts of the subject of asset and lawsuit protection and are discussed in four separate articles. 

A practical solution is to have enough insurance so the insurance company will pay the legal fees and will settle a bona fide claim where you are (or might be) at fault. Then, do everything that is reasonable to protect your personal assets from unnecessary exposure and to protect some of your assets from the most determined creditor. 

Extreme measures should not be considered until all of the more reasonable and less expensive measures have been utilized. 

1. "Lawsuit/asset protection is only for the wealthy or for crooks." 

The truth is that anyone with any assets that are worth more than the cost of litigation is a potential target. And you don't have to be guilty of any crimes to be a potential lawsuit victim. 

2. "If you buy "Package Z", you can thumb your nose at potential creditors." 

Run - don't walk - to the nearest exit if anyone tries to assure you that their packaged plan is a cure all. Be particularly wary of those who tell you that their plan will eliminate your income and estate tax obligations if you are a U.S. citizen or resident. 

3. "You can avoid lawsuits by going bare and canceling your insurance." 

Legal predators and lawyers do prefer to make claims against people who have a lot of insurance because the insurance company will usually settle to avoid the cost of litigation. For the lawyers, that's a quick piece of small change and they use that kind of money to pay the bills while they are working on a the big cases. 

However, if you don't have an insurance, the predators will look to see if you have any assets. A lack of insurance may discourage some of the lawyers who don't use the services of well qualified investigators, but a good investigator can find your assets. Going bare does not make you judgment proof unless you have also divested yourself of all your non-exempt assets. "Give the dog a bone". Keep a reasonable amount of liability insurance in force. (However, not all asset protection lawyers agree with this tactic. Some experts say that the insurance will just give the plaintiff's lawyer some working capital to go after the rest of your assets.) 

4. "Corporations will protect you from business claims." 

Corporations offer more protection than some other forms of business, but plaintiffs usually sue the officers, the directors and the corporation. When the corporation doesn't have enough assets or insurance to satisfy a claimant, they will find some reason to sue you as an officer or director of the corporation And, if you fail to observe the legalities of the corporation, the courts will often ignore its existence and hold you liable for the obligations of the corporation. 

5. "Liability insurance is all I need." 

Judgment creditors will not stop with your insurance. They want it all. Sometimes, insurance companies will pressure you to admit guilt to something in order to make a settlement. And some insurance companies go to great lengths to deny coverage when there is a claim. But ... the worst problem is that your insurance company might be insolvent when you need them the most. (See Insurance company solvency.) 

6. "I'll just transfer my assets to my family." 

If you don't make transfers to your family long before a claim occurs, the courts will take the money back from those to whom you gave it. Or ... if you made yourself insolvent by giving property away, the gifts will be legally invalid. And, giving property to family members exposes the assets to their creditors. 

7. "Family limited partnerships will protect your assets from creditors." 

The family limited partnership (FLP) is often being promoted as a cure-all asset protection device. On closer study, you will find that the FLP is a useful part of an asset protection plan, but it's no iron fortress - particularly if its only purpose is to hinder, delay or defraud creditors. 

8. "I'll just hide my assets where they can't be found." 

That seldom works except for small amounts. The most substantial assets like real estate, a pension plan or a small business can't be hidden. 

9. "An offshore asset protection trust will prevent a creditor from being able to get a judgment against you in a foreign jurisdiction." 

If the assets can be found (and they usually can), the U.S. courts can hold you in contempt if you refuse to make the assets available to your creditors if you have the legal power to do so. Therefore, you must effectively divest yourself of legal control over those assets. Otherwise, your offshore trust will be a formidable deterrent to a judgment creditor, but it's not an "ironclad fortress". 

Further details about protecting your assets from future lawsuits  are available in our subscriber's web site.

NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article. 

About the author: 

Vernon Jacobs is a CPA/CLU who works as a tax author and consultant.