Asset protection planning: your clients can’t afford not to plan
By Aaron M. Reed
NAFEP

Every 30 seconds a new lawsuit is filed in the United States. Approximately one in every 10 adults will be sued each year. The number of civil judgments over $1 million is rapidly increasing. Self-employed individuals and business owners face a 33 percent chance of being sued. These statistics are staggering. If these statistics do not convince you of the need for asset protection planning for your clients, then consider the following risks.

Do your clients drive an automobile? If so, it is estimated that 60 percent of all tort lawsuits involve car accidents. Wrongful death awards average more than $2.5 million. And, even if a child or friend is driving the vehicle at the time of an accident, your client still could be held liable.

Do your clients own a home or rental properties? If so, lawsuits can arise from personal injuries to guests or renters. There is also the risk of medical claims due to unsanitary conditions, mold or lead paint. Landlord-tenant contractual disputes are frequently litigated. Also consider is there an attractive nuisance on the property such as a swimming pool, hot tub or trampoline where children could be injured?

Are your clients self-employed, business owners, or officers of a corporation? If so, legal claims can come from discrimination, harassment, disputes with business creditors, breach of fiduciary obligations, wrongful terminations, contractual disputes, regulatory agencies and employee actions. Have you even considered liabilities arising from environmental hazards, products liability and shareholder liability?

Other risks that could expose your clients to a lawsuit include malpractice concerns, medical expenses in the event of unexpected illness, creditor disputes, divorce, neighbor disputes, animal bites and negligence.

Given all this, it seems as if one of America’s favorite pastimes is litigation. The prevalence of the “victim” mentality, contingency fees, and aggressive plaintiffs’ attorneys are overwhelming, not to mention the fact that defendants must pay for their own legal fees, even if they prevail in a lawsuit.

The first line of defense in any asset protection strategy is insurance. Through the use of insurance, some of the above risks can be transferred to the insurance company. Of course, the insured party is responsible for paying the premiums associated with these policies. Even though insurance is recommended as the first line of defense, it should not be the only asset protection technique that is used. An insurance policy will protect the insured only to the extent of the policy limits.
Furthermore, it is impossible to purchase insurance for all of the various risks that your clients face. Another problem is that the insurance company may deny a claim because of policy exclusions, gaps in coverage and various policy loopholes (such as misstatements in the application). Yet another risk is that the insurance company may become insolvent. Although we like to think of insurance as a golden parachute, it can sometimes fail when we need it the most. It is critical that your clients understand all of the terms, conditions and exclusions set forth in their policies.

If insurance does not adequately protect your clients and a creditor obtains a judgment, then almost everything they own can be seized. In most states, exemption laws protect very little of a person’s estate from creditors. Bank accounts, home equity, rental property equity, investment accounts, second vehicles, business interests, and personal property (such as televisions, electronics, collectibles, etc.) can all be taken in order to pay the judgment holder. The creditor also can garnish wages, annuity payments, rental income, and any other income stream that the person may be receiving.

Some people think that asset protection is only for wealthy individuals who have significant assets. But if your client owns a home and has a modest amount of money in a savings or investment account, then they may very well be a target. One of the first steps that a plaintiffs’ attorney will take when evaluating a case is to determine the assets held by the potential defendants. With so many resources available on the Internet, it is very easy to get public information about any person. It is also feasible that surveillance could be conducted on potential defendants to determine if it appears they have substantial wealth. If a potential defendant appears to have even moderate wealth, a plaintiffs’ attorney would likely pursue the case in anticipation of a quick settlement.

If you are still not convinced, consider these actual judgments:

$5.87 million for hosting a party where a guest later caused an automobile accident.

$6.2 million against a doctor who prescribed antihistamines that caused the patient to have an auto accident. Malpractice insurance did not cover the claim since the patient wasn’t suing, but instead it was the injured party who sued.

$300,000 for slapping a relative twice on the face.
$27 million against a property owner for failure to provide better lighting when a tenant was shot and killed.

I know that your clients work hard on a daily basis to provide for their families, create successful businesses, plan for retirement, and accumulate assets for their enjoyment. Yet, they must realize that all of their wealth can be taken in an instant. There are many risks that expose them to losing everything they have. Combine these risks with the increased litigation in our country, the contingent fee for attorneys, and the feeling of entitlement that some people have toward their property, and your clients just cannot afford not to engage in some degree of asset protection planning.

Insurance is a valuable tool to help manage these various risks, but it is only one of many tools that should be employed. With asset protection planning, the goal is diversification of the strategies to be used. It is unwise to leave the destiny of your client’s financial future solely in the hands of an insurance claims analyst.
A lawsuit can strike at anytime. All asset protection planners would agree that the time to set up an asset protection plan is now. If your clients set up a protection plan years before a claim against them arises and they have other legitimate reasons for engaging in such planning, then the planning and structures will usually be upheld by a court. If your clients wait to plan until after becoming aware of a potential claim, then the available strategies are greatly reduced due to fraudulent conveyance laws. Therefore, do your clients a favor and advise them to consult a competent, experienced, and proficient asset protection professional as soon as possible.