Understanding Losses: Liability Exposure
We live in a litigious society. Lawsuits abound, whether deserved or not. If you own property or stock that was purchased at a low price and has had high appreciation, it is at risk to litigation and creditors—even if you are not in a high-risk profession. Others may be in a private business such as medicine or law that bring with it additional exposures to monitor.
The Key Takeaways
- Assets that have high appreciation are at risk of litigation and creditors.
- There are steps you can and should take now to protect your assets, especially if you have considerable wealth in these assets.
We Are All at Risk
The wealthy, celebrities and sports figures are easy targets for lawsuits, as are those in high-risk professions, such as the medical field (doctors, dentists, other health care professionals), lawyers, accountants, architects and those in construction (builders, developers).
Note: As a general rule, you can’t limit your professional liability through legal means. If you are concerned about a professional claim, the best first step is to have adequate malpractice insurance. However, additional protective steps should still be taken to secure your private practice or business from creditors and non-malpractice litigants.
But, really, we are all at risk of liability claims. These can include business deals that have gone wrong, car accidents, sexual harassment claims and slip-and-fall claims. Even the behavior of children, their spouses and ex-spouses can lead to loss of family wealth.
What You Need to Know
The best time to do asset protection planning is before a claim arises, when there are only unknown potential future creditors. While there are some options even with an existing claim (such as an ERISA qualified plan), it is highly important to avoid fraudulent transfers. (A fraudulent transfer, also known as fraudulent conveyance, is a transfer of wealth to another person or company to swindle, delay or hinder a creditor, or to put the wealth beyond the creditor’s reach.)
Actions to Consider
- Asset protection planning must be accomplished under the guidance and planning of qualified professionals. A misstep or unintended error can negate the entire process and fully expose your assets.
- Everyone should have personal liability insurance, which is quite inexpensive.
- Existing state and federal exemptions should be maximized. State exemptions can include personal property, life insurance, annuities, IRAs, homestead and joint tenancy. Federal exemptions include ERISA, which covers 401(k) plans, pensions and profit sharing plans.
- Sometimes it is possible to convert non-exempt assets into exempt assets. For example, cash can be invested to pay down a mortgage to increase home equity, or an unprotected IRA can be transferred into an ERISA plan.
- Sometimes assets can be transferred to the spouse who is not at risk. But should a divorce occur, these assets will be owned by that spouse.
- Limited liability companies (LLCs) can be formed to remove expensive equipment from a business or practice, which is then leased back to the business or practice.
- Family limited partnerships (FLPs) can be formed to own non-practice assets (personal and investment real estate, investment accounts, bank accounts, collectibles), which can be leased back to the individual.
- Domestic asset protection trusts (formed in certain states) and offshore asset protection trusts are also options that can be used.