These days, lawsuits can happen to anyone, at anytime. In
the United States alone, roughly 15 million civil cases are filed each year. For
those who work in fields where lawsuits are common—doctors, lawyers,
architects, business owners—getting sued seems inevitable. A study published in
the New England Journal of Medicine found that 99 percent of
physicians in high-risk specialties will deal with at least one malpractice
suit before retirement age.
Fortunately, asset protection tools can be used to shield
your property and possessions—your financial accounts as well as your home and
business—from future litigation and would-be creditors. The following steps can
help make you a less attractive target to someone who’s eager to sue and—if you
are sued—can increase the likelihood of a favorable settlement:
Buy enough insurance. Adequate
insurance—for your business as well as yourself—is the first line of defense
when it comes to protecting assets. Work with a professional to ensure you have
sufficient coverage for your home, cars and other belongings. If you own a
business, your commercial general liability coverage should be checked and
updated regularly, and it may be appropriate to also purchase professional
liability insurance and employment practices insurance. Though it may seem
tedious, you should also read the fine print on all of these policies.
Rethink marital property. Creditors
may be able to force couples to liquidate jointly held assets to collect the
debtor’s share, so in some states it can make sense to protect assets by
signing them over to your spouse. However, there are significant limitations
and drawbacks to this approach. If you wind up divorcing, the divided
property could become the subject of disputes. Additionally, the assets must
actually become the spouse’s property. Creditors can go after assets that are
held in the spouse’s name if the debtor still controls them—like, writing
checks from a bank account, for example. And this approach may not work in
states with community property laws, where a married couple jointly owns almost
everything acquired during the marriage, no matter whom holds the title. Work
with a professional to find the best approach for your situation.
Set up a business
entity…or several. When you own everything under your own name or under
the name of one company, a single lawsuit can result in a catastrophic loss.
It’s better to hold your most valuable assets—real estate, equipment,
receivables—in separate entities. That may require multiple limited liability
companies (LLCs), other business entities, or various trusts. This way, only
the assets owned by the entity involved in the lawsuit are at risk. A
professional can help you set up the right entities and advise you on best
practices concerning their use.
Consider a domestic
asset protection trust (DAPT). An increasing number of states allow
individuals to establish very protective trusts that insulate assets from
creditors’ claims. Holding assets inside a DAPT can provide an additional layer
of protection from creditors in some states, but not all. Additionally, adding
a spendthrift clause to a DAPT can—again, in some states—protect the assets you
pass down to an heir from that heir’s creditors. The level and quality of
protection varies widely from state to state, so it’s essential to work with a
knowledgeable attorney to select the best jurisdiction and establish the trust
accordingly.
Consider sending
assets offshore. A foreign asset protection trust (FAPT) is a trust
held in another country, placing some of your assets out of the reach of U.S.
courts. Lawsuits targeting assets held in offshore trusts are
litigated in foreign jurisdictions, subject to foreign laws and justice
systems. This aspect alone can be enough to dissuade someone from filing a
suit. FAPTs are generally expensive to establish and maintain, and they’re
subject to heightened scrutiny and accounting requirements. But for many
clients these trusts make a lot of sense.
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