Got Assets? How to Protect Them From Greedy Lawsuits

A couple of stacks of hundred-dollar bills are secured with a lock and chain. — (Image credit: Getty Images)

Over the past few decades much has been written about the benefits of engaging in asset protection planning to protect one’s legacy from future unknown, unforeseen lawsuits and other third-party claims.

Anecdotally, I’ve seen that prospective plaintiffs are keen to settle their claims more quickly, and for far less, against those who have implemented lawful and timely asset protection planning strategies.

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Lawsuits are no fun

Over 90% of lawsuits settle for one of two reasons: Doubt as to liability and doubt as to collectability.

A properly structured asset protection plan creates the latter and fosters a robust environment for a quick and relatively modest settlement. But, as anyone who has been the target of a civil lawsuit knows, “the process is the punishment” regardless of the outcome for either party.

The emotional and financial toll is the worst

Litigation is a cruel and distasteful process. Aside from the financial cost of lawyers, experts, time away from work and family and the fear of the unknown, there is an emotional cost that can bring most innocent people to the breaking point.

Plaintiff’s lawyers know this and often use the “process” of the legal system to exert maximum pain on the defendant — with the goal of getting a quick settlement to make the pain stop. Failure to prepare for this by effective asset protection planning leaves no way to “level the playing field” with the plaintiff.

Protecting assets by stashing them safely

Asset protection planning can remove the “profit from the pursuit,” thereby fostering a more robust environment for the parties to settle.

Here is an example that makes this point: Lawrence’s estate lawyer advised him to incorporate asset protection planning while planning his estate.

Besides the traditional family trust used to avoid probate at death and secure some level of asset privacy, the attorney recommended his client use various structures to move assets off of Lawrence’s balance sheet, such that he no longer owned those assets.

His residence was placed in a single-member LLC (managed by Lawrence).
The LLC interest was then placed in an irrevocable trust established in Nevada, a state that allows asset protection trusts. Lawrence then rented the home from the LLC at fair market rent, becoming a “tenant” of the property vs. being the owner.
Lawrence placed his nonqualified retirement investment portfolio in an asset protection trust and has his life insurance policy held in an irrevocable life insurance trust.
Lawrence’s rental properties were held in an irrevocable trust established for his children and grandchildren as part of his legacy planning, shifting the future appreciation from Lawrence’s gross estate and saving the estate taxes that would have otherwise been due at his death.

All of this planning was done at a time when Lawrence had no current, foreseeable or expectant lawsuit creditors, and he remained solvent after the planning was completed.

What these strategies accomplished

Should Lawrence find himself threatened with a legal claim, the plaintiff would learn the assets he thought belonged to Lawrence are no longer owned by him. Rather, they are held in structures not owned by Lawrence and administered by independent trustees.

The chances of the plaintiff successfully enforcing a judgment and recovering assets from these other structures could be disappointing for the plaintiff. Under these circumstances, a plaintiff is more motivated to talk settlement.

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They may even walk away from the lawsuit, rather than expend the time and money associated with bringing the claim, considering the prospect of not being able to enforce the judgment if successful.

Avoiding litigation entirely is the ultimate win

The result is that Lawrence will have not only protected his “treasure,” but more importantly, he avoided the litigation “process” and all that this encompasses as described above.

This translates into Lawrence securing peace of mind knowing that he wasn’t going to be financially devastated by an unforeseen lawsuit that didn’t go his way. And even if the plaintiff wasn’t deterred by Lawrence’s planning, it’s much less likely that Lawrence would have lost these assets to the judgment creditor.

Do you need an asset protection plan?

If your estate plan does not include “asset protection planning,” you will not have the tools to defend against an aggressive and ambitious lawyer from taking your assets and leaving you and your family vulnerable.

If you do not have asset protection planning as part of your estate planning, you may wish to do so in order to avoid a disastrous outcome.

The information in this article is for informational purposes only and does not constitute legal or tax advice.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jeffrey M. Verdon, Esq. is the lead asset protection and tax partner at the national full-service law firm of Falcon Rappaport & Berkman. With more than 30 years of experience in designing and implementing integrated estate planning and asset protection structures, Mr. Verdon serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives. Over the past four years, he has contributed 25 articles to the Kiplinger Building Wealth online platform.