A Risk That Could Cost You Everything: The Dunning-Kruger Effect

You don’t know what you don't know. (And once you realize what you didn't know, well, it may be too late.)

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.

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!

About the Author

Jeffrey M. Verdon, Esq.

Managing Partner, Jeffrey M. Verdon Law Group, LLP

Jeffrey M. Verdon, Esq. is the managing partner of the Jeffrey M. Verdon Law Group, LLP, a Trusts & Estates boutique law firm located in Newport Beach, Calif. With more than 30 years of experience in designing and implementing comprehensive estate planning and asset protection structures, the law firm serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives.

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 17, 2021
Thinking of Buying an RV or Motor Home? Think Again!
personal finance

Thinking of Buying an RV or Motor Home? Think Again!

A Lemon Law attorney has some insights on the downsides of RV ownership you should think about before putting your money down and hitting the road.
May 16, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021. Payments will start July 15.
May 17, 2021


33 States with No Estate Taxes or Inheritance Taxes

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 13, 2021
Estate-Planning Your Stuff with T. Eric Reich
Empty Nesters

Estate-Planning Your Stuff with T. Eric Reich

What to do with the house, the vacation house and the china? We talk with a financial adviser who's got some wise counsel. Also, who makes up the so-c…
May 2, 2021
Veteran Financial Advice to the NFL's New "Overnight Millionaires"
Brandon Copeland

Veteran Financial Advice to the NFL's New "Overnight Millionaires"

As the NFL Draft looms, contributing editor and NFL linebacker Brandon Copeland offers guidance to those about to receive a boatload of …
April 26, 2021
What You Need to Know about College 529 Savings Plans
529 Plans

What You Need to Know about College 529 Savings Plans

Do you know how much you’re able to contribute or what the funds could be used to pay for? How about how contributing affects your taxes? Check out th…
April 14, 2021