How to Protect Yourself From Lawsuits
These strategies can help keep your assets safe if you wind up in court.
By Matthew T. McClintock, J.D.
Vice President, Education, WealthCounsel
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.
Not all of these asset protection strategies are necessary or appropriate for everyone, but just one or two can dramatically decrease the losses you’ll risk in the event of a lawsuit. Talk to an estate planning professional to determine what’s best for your situation. To find one near you, click here.
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