Asset Protection Planning is the use of legal tools and strategies to protect the assets of individuals and families from the threat of frivolous and predatory lawsuits, or similar unanticipated creditors.
The Business of Litigation
In America, more than 40,000 civil lawsuits are filed daily. Civil litigation has become a $300 billion annual industry in America, where hard working entrepreneurs, professionals, and business owners are targeted as a source of revenue. This dysfunctional system has several contributing factors:
- The Contingency Fee: The lawyer gets a 25%-50% cut of the judgment if successful, creating a huge financial incentive for attorneys to sue with high frequency.
- Unfair Distribution of Legal Costs: While most of the world makes the losing party pay the legal costs of both parties, in America, the “winner” of a civil lawsuit generally pays their own way, thereby lowering the overall cost of filing a frivolous lawsuit.
- Explosion of Attorney Advertising. We are constantly bombarded with attorney advertisements that encourage us to sue for any number of perceived “injustices”.
- Ethical & Procedural Rules have changed. In recent decades, ethical guidelines and court procedures have made it much easier to file and sustain a frivolous lawsuit.
Your First Lines of Defense
The Law. Federal & State law help protect certain assets from creditors. Most Retirement assets, and select investments, are protected from creditors/lawsuits (pension, 401k, IRA, 403b, some life insurance, some annuities). Bankruptcy statutes also protect some assets from creditors, provided you file for bankruptcy. Homestead laws protect a portion of your home equity from creditors ($150K in Arizona).
Business Entities. Business entities such as Limited Liability Companies (LLC), Limited Partnerships (LP), and Corporations provide individual owners with protection from the debts of the business. Some entities also do an excellent job of protecting business assets from personal debts. Business entities are inexpensive to form in Arizona and you can use several entities to protect assets.
Insurance. We should have as much as we can reasonably afford. Property & casualty (home & auto), general liability, and professional liability are necessary. Overlooked forms of insurance include Umbrella Insurance (increase coverage to $1 Million or more), Employment Practices Liability (EPLI) protecting owners from employee or ex-employee lawsuits, Cyber Liability or Data Breach insurance, protecting your business from hacking.
Effective Asset Protection Requires a Comprehensive Approach
If you are vulnerable to a frivolous lawsuit, use and understand the protection you already have, then add legal tools in an integrated approach after seeking legal advice. More sophisticated strategies may include Irrevocable Trusts that work with your existing business entities and estate plan.
ACT NOW, BEFORE a legal crisis occurs. Asset Protection is difficult after a lawsuit has started, and you do not want to be guilty of “Fraudulent Transfer” or “Voidable Transfer” where it appears that you are hiding assets after being sued. Not only will you likely be forced to undo all of your asset protection, but you could be subject to penalties, and criminal charges. Be realistic about the risks you face and how losing a lawsuit might affect your lifestyle, family, and posterity. Taking a comprehensive approach to Asset Protection will better allow you to….
Leave a Legacy, Not a Burden!