Legal Methods of Asset Protection
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How To Protect Yourself From

The Lawsuit Epidemic In The U.S.

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 out of that group of 400 families. If you in are that top 10%, there is a lawyer somewhere who is just waiting for you to make a mistake - any kind of mistake. 

Does that help to put the problem in perspective?

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

Here are a few of the excuses that can be used by legal predators to confiscate your assets. 

  • 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
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 your 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. 

What 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 and 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 that these are not all legal methods of asset protection.) 

  1. Transferring assets to safe family members
  2. Securing assets with loans from other family members
  3. Hiding non income producing assets in obscure places
  4. Using a corporation for business activities
  5. Putting assets into a limited partnership
  6. Putting assets into an irrevocable trust
  7. Putting money into life insurance owned by others
  8. Giving money to a charitable trust or family foundation
  9. Moving money into offshore trusts or corporations
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 inquire about my newsletter and made the following comment regarding the concept of asset protection.

"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 strategies 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 of 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 that 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 Strategies

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 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. 

  1. Warning: 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".
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. If 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.
  7. 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.
  8. Avoid being on any board of directors unless they can assure you that they have ample insurance coverage. Be particularly careful about serving on the board of a closely held corporation.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
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. He  writes a free email newsletter on asset protection and offshore topics..   He can be reached by phone at (913) 362-9667.