ASSET PROTECTION – Part 1
Ethan R. Okura
Today I want to talk about Asset Protection. What is Asset Protection? Asset Protection is creating and implementing a plan to protect your hard-earned wealth from creditors—people to whom you owe money. If you’ve borrowed money and can’t pay it back, or if you’ve been sued by someone and lost in court, then you have creditors who will try to come after your assets. If you owe alimony or child support payments, your former spouse or children could also be creditors. However, the law very strongly protects the rights of ex-spouses and children to receive their alimony and child support payments regardless of most asset protection planning techniques.
As you may be aware, the United States is reputed to be the most litigious country in the world! (This means that we sue each other more here than anywhere else). According to one source, we spend twice as much on civil litigation each year as what is spent on new cars. A full 2.2% of our Gross Domestic Product goes towards tort costs for a total of about 250 billion dollars annually—about 9 times the dollar amount spent by the next leading industrialized nation. A tort is a civil claim for damages based on a wrongful act (but not a breach of contract).
One quick example of an actual tort lawsuit that seems frivolous: A bar owner in Illinois was fed up with several recent break-ins at his bar, so he set up a trap to keep burglars from getting in through his windows. Even though the owner posted warning signs regarding the trap, a burglar attempted to get in anyway and electrocuted himself when he set off the trap in the process. The burglar’s family sued and won a jury judgment against the bar owner for the death of their burglar. Doesn’t that seem wrong?
Well, what can you do to protect yourself? Asset Protection (sometimes referred to as Creditor-Debtor law) is a complex area of the law and any asset protection plan should be specifically tailored to your circumstances. If you come across someone selling a “one size fits all” or “bullet proof” solution—whether it be a special kind of trust, a corporation in another jurisdiction, or any other single defense—be cautious before jumping in.
When doing asset protection planning, it’s best to have multiple layers of defense. Your first layer of defense in most cases should be a good insurance policy. An umbrella insurance policy is relatively inexpensive and covers your extra liability up to the limits of the policy when your other insurance has been exhausted. You can often find an umbrella policy with $2,000,000 of liability coverage for about $300-$400 per year in premium costs. A common second layer of defense is a Corporation or a Limited Liability Company (also known as an LLC) to insulate your personal assets from your business assets.
Before going forward with an explanation about these next layers of defense, an important concept to understand in asset protection is the difference between inside and outside liability. If you have a business, say for example you own a rental home, you could have a tenant slip and fall on the stairs (which you neglected to make safe) and the tenant could sue you as the homeowner. If you didn’t buy adequate umbrella insurance and you lose that law suit, the winning tenant could take your savings and almost any of your other assets including your rental property. If you own your rental home within an LLC instead of directly in your own name, the tenant can sue the owner of the home, which is the LLC. If the tenant wins in this case, the tenant could take anything owned by the LLC up to the judgment amount, including your rental home, but they should not be able to go after your other assets. The LLC limits your liability and provides protection from inside liability. In other words, the LLC protects your outside assets from liabilities generated within the LLC. On the other hand, if you were texting while driving and caused a car accident resulting in someone’s death, their family could sue you and if they won a judgment larger than your umbrella insurance coverage, they could take away your other assets including your rental home to satisfy that judgment. The judgment from this lawsuit would be considered an outside liability in relation to your rental property. Even if you own your rental home in an LLC, the judgment creditors can still take the LLC away from you (after all the LLC is your asset), and your rental home would be lost along with it.
Next month I’ll write more about some of the other asset protection techniques available. Stay tuned!