Developing an Asset Protection Plan

December 4, 2019

On average, a new lawsuit is filed every two seconds in the United States. But few of us seriously consider the possibility of a lawsuit or other legal action against us in our daily lives. The vast majority of lawsuit defendants never thought it would happen to them. Developing an asset protection plan is a critical way to minimize risks due to litigation. Anyone with significant assets and potential exposure to frivolous lawsuits, such as physicians and business owners, should make asset protection planning a priority. It is often the last line of defense to protect an individual’s or family’s personal assets and wealth. A recent study of business owners revealed that 75% of them are worried about being the target of a frivolous or unfair lawsuit. Yet only 15% of business owners actually have an asset protection plan in place.  A lack of awareness or guidance is the main reason cited for the lack of asset protection planning. What is Asset Protection Planning? Asset protection is proactive planning to safeguard personal assets from future potential claims, such as unjust lawsuits and outrageous jury awards from personal or professional liability. The goal of an asset protection plan or structure is to discourage possible legal action against the individual and to bring any pertinent legal problems to a swift conclusion.  Asset protection arrangements, however, will not allow an individual to avoid paying their legitimate debts. A Strong Defense The most effective asset protection plan is one that goes unchallenged. In other words, the best offense is often a strong defense. If the protective structures of an individual are perceived as too formidable or expensive to breach, the creditor may come to the conclusion that (s)he may not be able to collect the claim. This may force the creditor to pursue a smaller settlement. Keep in mind though that an overly aggressive asset protection plan could backfire, particularly if a judge or jury perceives that the structures put in place are an attempt to dodge your financial responsibilities. A Continuum Rather than a Silver Bullet There is no one “silver bullet” of asset protection.  It is most effective where there are layers of protection – as illustrated in overlapping graphics on the continuum represented below.  Techniques utilized must be legitimate for business and/or estate planning purposes (not solely to shield assets).  In general, asset protection is inversely related to your level of control over assets. Liability insurance Liability coverage can be an effective way to provide asset protection, as long as the creditor’s claim is not a result of unpaid bills. Insurance is typically the first line of defense in managing risks like protecting personal assets. At minimum, families should have an umbrella liability insurance policy. For life insurance and annuities, some states offer protection of the cash value only while other jurisdictions account for the financial needs of the beneficiaries when determining the extent of conservation. All businesses should have some form a general liability insurance policy, including directors and officers (D&O) insurance. Those with staff members should also have an employee practices liability insurance (EPLI) policy. Advanced Estate Planning A properly structured and funded trust is a common and effective arrangement for personal asset protection. Using certain types of irrevocable trusts and gifting strategies can help shelter assets from claims against the donor. With lifetime exemption amounts now at all-time highs, many families now have greater opportunities to shift assets to descendants, either directly or for their beneficial interests through trusts and other arrangements. Business or Real Estate Considerations Limited liability companies (LLCs) can be used as a buffer of protection for a business owner or real estate investor. These structures and other legal arrangements segregate the entity’s assets from the owner’s personal assets. See in the depiction below how an LLC (on the right side) can prevent the investor’s entire asset base from being exposed to lawsuit (left side of illustration).   Conclusion Most individuals and families have worked hard to accumulate their assets. But as your net worth increases, it can be become more challenging to protect it. A well-structured, comprehensive asset protection plan is critical to ensure the preservation and proper risk management.   This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.