Here’s a stunning statistic for you: A new lawsuit is filed every two seconds in the U.S. That can present a huge, unforeseen risk to many people, especially those who have the most to lose: the wealthy. However, if you’re in the middle class, don’t think you’re immune.
Consider this cautionary tale. Sara and Jonah Williams worked for 30 years to build their fledgling business into a thriving franchise with stores throughout the nation. They thought they were protected by their thorough estate planning … until the unthinkable happened. Out of the blue they were sued by a plaintiff seeking to recover millions of dollars.
The Williamses contacted their estate planning attorney to find out if their estate plan protected their personal assets from this lawsuit. Unfortunately, their trust attorney had only used the garden variety revocable living trust, which provides no “firewall” protection from lawsuits. In the end, they were forced to settle for a king’s ransom, as they could not risk having a jury rule against them. The Williamses just didn’t know what they didn’t know.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If their trust attorney had created an estate plan with firewall protection, which involves both conventional estate planning structures to maximize the amount one may pass along at death, as well as effective “blockers” to protect their trust’s assets, their assets would have been sufficiently protected. This would have encouraged a minimal and early settlement by the plaintiffs.
Why You May Be at Risk
Affluent families and successful business owners are routinely targets for lawsuits, often devoid of legal merit, because the plaintiffs and their lawyers know that the defendant, at the end of the day, will settle rather than remain embroiled in lengthy litigation. Without proper asset protection planning in place well before any legal claim, all could be lost.
Don’t let this happen to you. Too many business owners and affluent families wait until they are sued or in trouble to inquire about protecting their assets. This problem of meta-ignorance — a person’s ignorance of ignorance — is known as the Dunning Kruger-Effect, named after the social psychologists who described it, Justin Kruger and David Dunning.
Asset protection is all about protecting your family and your legacy before the fact, not after the legal claim arises.
What You Can Do About It
Even those with estates of more moderate size can benefit from this form of planning. Removing the prospect of collectability from a legal judgment forces most plaintiffs to settle early and inexpensively, enabling clients to hold on to what they have worked so hard for over the years.
Working with a professional who can provide a comprehensive estate and asset protection plan can reduce death taxes and establish firewall protection to dissuade catastrophic lawsuits. Components of this plan could include:
- Maximizing contributions to the 401(k) or qualified retirement plans, which enjoy state-sanctioned exemption laws.
- Using a third-party dynasty trust established in one of the states whose laws expressly permit the unique protections against lawsuits, as Nevada, or Alaska, into which assets are held for the benefit of the kids and grandkids, but which provides the flexibility of the donors to reclaim the assets if they later need or want them through the exercise of powers granted to the independent trustee.
- Establishing limited partnerships or limited liability companies to own rental real estate and other operating businesses to gain charging order protection in case of a personal lawsuit.
- Establishing a foreign asset protection trust at a time when there are no known, expected or foreseeable lawsuits, in one of the recognized countries that offer added protections for trusts established in country.
This comprehensive strategy offers more robust estate planning structures and discourages frivolous lawsuits and other opportunistic litigants.
You now know what you should know!
-
Stocks Keep Climbing as Fed Meeting Nears: Stock Market TodayA stale inflation report and improving consumer sentiment did little to shift expectations for a rate cut next week.
-
Your End of Year Insurance Coverage Review ChecklistStop paying for insurance you don't need and close coverage gaps you didn't know about with this year-end insurance review.
-
Crypto Trends to Watch in 2026Cryptocurrency is still less than 20 years old, but it remains a fast-moving (and also maturing) market. Here are the crypto trends to watch for in 2026.
-
Time Is Running Out to Make the Best Moves to Save on Your 2025 TaxesDon't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
I'm an Insurance Pro: If You Do One Boring Task Before the End of the Year, Make It This One (It Could Save You Thousands)Who wants to check insurance policies when there's fun to be had? Still, making sure everything is up to date (coverage and deductibles) can save you a ton.
-
4 Smart Ways Retirees Can Give More to Charity, From a Financial AdviserFor retirees, tax efficiency and charitable giving should go hand in hand. After all, why not maximize your gifts and minimize the amount that goes to the IRS?
-
3 Year-End Tax Strategies for Retirees With $2 Million to $10 MillionTo avoid the OBBB messing up your whole tax strategy, get your Roth conversions and charitable bunching done by year's end.
-
'Politics' Is a Dirty Word for Some Financial Advisers: 3 Reasons This Financial Planner Vehemently DisagreesYour financial plan should be aligned with your values and your politics. If your adviser refuses to talk about them, it's time to go elsewhere.
-
For a Move Abroad, Choosing a Fiduciary Financial Planner Who Sees Both Sides of the Border Is CriticalWorking with a cross-border financial planner is essential to integrate tax, estate and visa considerations and avoid costly, unexpected liabilities.
-
I'm a Financial Adviser: This Tax Trap Costs High Earners Thousands Each YearMutual funds in taxable accounts can quietly erode your returns. More efficient tools, such as ETFs and direct indexing, can help improve after-tax returns.
-
A Financial Adviser's Guide to Divorce Finalization: Tying Up the Loose EndsAfter signing the divorce agreement, you'll need to tackle the administrative work that will allow you to start over.
