This is a
free Web Book, funded in part by advertising
How To Protect
The Lawsuit Epidemic In
U.S. citizens and residents with assets or insurance are targets for
entrepreneurial plaintiffs and lawyers who are
looking for a big payoff. It's no longer just a case of suing someone
after they injure another party. Now the lawyers are engaging in
proactive "marketing" to find people they can sue. Finding a
"victim" is no longer very difficult.
The United States is one of a few countries in the world where
lawyers are permitted to receive contingent fees based on the amount of
a judgment for their client. Lawyers working for a contingent fee have
far better odds of making a million dollars or more on a single case
than any lottery contestant.
A widely quoted statistic is that there are more than 700,000
lawyers in the U.S.. However, all of these lawyers aren't involved in
suing people. There are about 66,000 lawyers who are members of the ABA
Litigation Section but only about 1/3 of the lawyers belong to the ABA.
If litigation lawyers are typical, there are about 198,000 lawyers who
are in the business of suing people. That means that for every 400
families in the U.S. there is one lawyer who is looking for someone to
sue. If those lawyers only concentrate on the top ten percent of the
market, that means they will be looking for just forty people to sue
of that group of 400 families. If you in are that top 10%, there is
lawyer somewhere who is just waiting for you to make a mistake -
kind of mistake.
Does that help to put the problem in
If you have money (or insurance), you are at risk. In 1989,
1.2% of all families with an income over $50,000 were sued in a U.S.
District Court. And that's the tip of the iceberg. (Lawsuit stats http://www.sickoflawsuits.org/content/resources/fast_facts.cfm)
Here are a few of the
excuses that can be used by legal predators to confiscate your
And ... you can also be held liable for the acts of your spouse, your
children, your employees, your partners, and anyone who uses any of
property or is acting on your behalf. Fault or negligence is no
longer necessary to be held liable for someone else's injuries or
damages. The courts and the juries are far more concerned about finding
some way to help an injured plaintiff than about whether the defendant
(you) is really at fault.
- Personal injury claims or divorce
- Civil rights violations
- Environmental cleanup liability
- Malpractice and product liability
- Employee injuries
- Occupational Safety & Health Administration violations
- Federal and state tax liens
Can You Do To Protect Yourself?
Here are two paradoxes for you. The safest way to legally avoid paying
income taxes is to avoid having any income. And ... the best way to
avoid losing your assets if you are sued is to be devoid of any assets.
While each of these two statements might seem to be contradictory, they
accurately describe how the wealthy are able to minimize their taxes
protect their wealth.
For example, "income" for tax purposes is defined by the law.
You may have economic income without having taxable income. Interest on
tax exempt bonds isn't considered income for federal tax purposes
unless you are receiving Social Security benefits. The
gain on assets that grow in value isn't currently taxed.
"It's not what I own, it's what
I control that really counts."
This is a quote from a wealthy individual who understands
money. This person had given control of his business to his adult
children and his retired parents. But he is confident that his children
are unable to use the business to make money without his participation.
He is the real source of the money. The legal ownership of his
corporation is of far less importance than his ability to control the
business. For the same reason, politicians have power without
ownership because they can control other people's assets.
There are a mind boggling variety of ways that people use to
retain a substantial element of control without retaining unrestricted
ownership. Here are a few of the more popular methods. (Please note
these are not all legal methods of asset protection.)
Some people seem to think that the last strategy is the only strategy
used to protect assets. A reporter from the L.A. Times called to
about my newsletter and made the following comment regarding the
of asset protection.
- Transferring assets to safe family members
- Securing assets with loans from other family members
- Hiding non income producing assets in obscure places
- Using a corporation for business
- Putting assets into a limited
- Putting assets into an irrevocable
- Putting money into life insurance
owned by others
- Giving money to a charitable trust
or family foundation
- Moving money into offshore trusts
"I thought that only drug dealers and
swindlers used offshore trusts."
Offshore trusts are only one of the
many devices used by the wealthy to protect their assets from predatory
plaintiffs and lawyers. There is little doubt that those who operate
outside of the law will use the law to their advantage whenever they
can. However, the offshore asset
protection trust is "The Final Step" for the law abiding citizen.
It's the last resort for those
with a lot of money. Asset protection is
not just about offshore trusts. It's about a variety of legal
and techniques to use the protection of the law to avoid unnecessary
losses. It's about finding ways to change the legal form of ownership
your assets without losing effective control of the assets.
Most people with modest estates are at great risk simply
because of the common practice of putting property in joint ownership. Creditors
of either owner can take jointly held property in most states. Of
18 million businesses in the U.S., over 70% are unincorporated
proprietorships. While a corporation isn't a perfect legal protection,
it's a very economical way to reduce your exposure to some types of
losses. These are simple lawsuit protection strategies that are not
expensive or even complicated.
Beware of Defrauding Your Creditors
If you wait to do something until someone brings a lawsuit against you,
it's really too late.
Anything you do to remove your assets from the reach of
your creditors after a lawsuit is filed is likely to be a "fraudulent
conveyance." That means the courts can and will seek to obtain
repossession from the transferee. One specialist in the field says that
if you are in a high risk profession or occupation, you must keep some
assets (or insurance) available to your creditors or the courts can
recover the assets.
You must take steps to protect your assets before
there are any potential claims against you.
Like estate planning, if you wait until you have a problem,
it's too late to solve it. Like insurance, lawsuit protection
planning must be done when you don't think you need it.
The various state courts have indicated that there must not be
any reasonable prospect of a specific claim against you at the time
you put your assets beyond the reach of your creditors. In most states,
that seems to be a period of one to three years before any claim is
filed against you. Also, in some states, assets are protected unless
there is a known liability or obligation. In other states, future
creditors may have a claim against your assets. This is why it's
important to have a well qualified lawyer who is familiar with these v
variations in state laws.
A Checklist of 14 Lawsuit Protection
The practical solution to the "lawsuit epidemic" in the U.S. is to spend
a little bit of time to stop being an easy target. When you take
the time to lock your doors, a thief is likely to go on to an easier
target. Lawsuit protection is like locking your doors.
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
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
Further details about protecting your assets from future lawsuits
are available in our subscriber's
- Warning: Joint ownership
may be hazardous to your wealth. Don't put assets in joint
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".
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
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
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
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.
rely on a domestic, revocable living trust
lawsuit protection. It may help to avoid some state probate
but it does not remove your assets from your future creditors.
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
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
beneficiary are not subject to the general provisions of your will or
you have more than US$1,500,000, you need an estate plan. The
current U.S. estate tax law exempts up to $1,500,000 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.
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
ample insurance coverage. Be particularly careful about serving on the
board of a closely held corporation.
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
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
- 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
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.
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.
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:
Jacobs is a CPA/CLU who works as a tax author and consultant. He writes a free email newsletter on asset
protection and offshore topics.. He can be reached by
phone at (913) 362-9667.