While there are at least 198,000 trial lawyers who are working hard
to find opportunities to separate you from your money, there are only a
few hundred lawyers who specialize in helping you to protect your assets
from all of those other lawyers. There is no single, safe and simple device
that will totally thwart a determined creditor when there is a lot of money
at stake.
Here are some of the practical things you can do to protect yourself
from losing everything if you should lose a future lawsuit.
Joint ownership may be hazardous to your wealth. Don't
put assets in joint ownership without having a good reason and without
the advice of competent legal counsel. The general rule is to avoid
joint ownership, because those assets are subjected to a double risk.
The creditors of both owners can attach any jointly held assets. Spend
some time with an attorney to learn about "joint ownership with right of
survivorship", "tenants in common" and "tenancies by the entirety".
Don't put anyone else on your personal bank account. If someone
else is treated as a co-signer of your bank account, your assets could
be exposed to their creditors. Avoid giving a family member the power to
be an co-owner on a bank account. Your creditors can take the assets from
an account where you can withdraw funds on your own signature. If there
is a need to sign checks on someone's account, check with an attorney about
being authorized to do so with a power of attorney, as an agent of the
account owner or as a trustee. Some banks offer an arrangement whereby
you are treated as an agent of the owner of a personal account so that
you can sign checks on the account, but you don't have the legal right
to take money in the account for your own use. If the bank won't accept
that type of arrangement, consider having the account owned by a trust,
in which you can be a trustee - or the only trustee. Another option is
to find another bank.
Don't rely on a domestic, revocable living trust for lawsuit protection.
It may help to avoid some state probate expenses, but it does not remove
your assets from your future creditors.
Use a corporation or LLC to operate a business . If there are
tax reasons to operate as a proprietor, make an election to be taxed as
an S corporation or establish a LLC to own the business. Observe the legal
formalities of the corporation or LLC and don't treat the corporate checkbook
like a personal account.
Have a detailed review of the form of title to your assets. A
common problem is to set up a limited partnership or irrevocable trust
or corporation and to fail to change the title to your property. Jointly
held assets pass outside of your will or your trust. Assets with a named
beneficiary are not subject to the general provisions of your will or your
trust.
If you have more than US$675,000, you need an estate plan. The
current U.S. estate tax law (for 2001) exempts up to $675,000 of an estate
from the estate tax. Any assets in excess of that amount may be subject
to some estate taxes without some estate planning. Do it right and co-ordinate
it with your asset protection plan. (The exemption will increase to $1
million in 2002 and other changes will be phased in over the next ten years.)
Risk management is an organized system of dealing with risk.
You compile a list of potential risks. Then you decide how much you can
afford to self insure. Then you decide whether there are some risks you
can get rid of - like an apartment building where the tenants might be
injured. The last step is to look for insurance.
Avoid being on any board of directors unless they can assure
you that they have ample liability insurance coverage. Be particularly
careful about serving on the board of a closely held corporation.
You shouldn't do lawsuit protection in a vacuum. Your asset and
lawsuit protection strategies need to be integrated with your other financial
planning concerns like your personal insurance, your investment allocation
plan, your income tax strategies, your estate plan and your business plans.
Be careful about acquiring title to any land. Require a qualified
environmental waste examination. If any land is contaminated by hazardous
wastes, you could become fully liable for the entire clean up costs if
you are an owner or co-owner, operator or transporter of the waste at any
time. You could even have legal exposure as a trustee, executor of an estate
or as a partner of a firm that owns contaminated land.
Don't rely entirely on one advisor. Get competent advisors who
are willing to work with you to develop a practical asset protection strategy.
Get referrals from other professionals in the field. Interview at least
three or four prospects in each field. Don't be frustrated by disagreements
between your advisors. It's healthy. Listen and learn. Always be willing
to get a second opinion before making a major commitment. Get second opinions
on any advice from those who work purely on a commission basis. Don't let
your advisors have discretionary control of your assets unless you can
afford to lose those assets.
Don't ignore legal protocols. Respect the separation of ownership
when you create limited partnerships, corporations, irrevocable trusts
or charitable entities. These are all creatures of the law. If you ignore
the legal protocols, the courts can ignore the existence of these entities.
Separate the ownership and control of your assets. To avoid losing
your assets to a claimant in a lawsuit, you must divest yourself of the
ownership of the assets long before any claim occurs. That means making
valid restricted gifts to your spouse, parents or children, but not to
the point of becoming insolvent.
Don't be a pig. Leave some fat on the bones so that potential
creditors will be willing to walk away from some of your assets and give
you a chance to start over.