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).
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.
There are two main types of liabilities to protect from when considering your asset protection strategies: inside liability; and outside liability. Inside liabilities are liabilities arising from assets you own. Outside liability arises from your own actions (or non-actions). For example, if you have a business, and 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 lawsuit, the winning tenant could take your savings and almost any of your other assets including your rental property. This would be a type of inside liability. 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. Typically, different strategies are necessary to protect against these two different types of liabilities.