How to Protect Your Assets From Lawsuits
These days, lawsuits can happen to anyone at any time. In the United States alone, tens of millions of 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 is eager to sue and increase the likelihood of a favorable settlement if you are sued.
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, you should regularly check and update your commercial general liability coverage, and it may be appropriate to also purchase professional liability insurance and employment practices insurance. Though it may seem tedious, you should 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, for example, by writing checks from a bank account. This approach also may not work in states with community property laws, where a married couple jointly owns almost everything acquired during the marriage, no matter who holds the title. Work with an estate planning attorney to find the best approach for your situation.
Set up one or more business entities. 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 is better to hold your most valuable assets, like real estate, equipment, and receivables, in separate entities. This may require multiple limited liability companies, other business entities, or various trusts. This way, only the assets owned by the entity involved in the lawsuit are at risk. An estate planning attorney 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, 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 is 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 US 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 lawsuit. FAPTs are generally expensive to establish and maintain, and they are subject to heightened scrutiny and accounting requirements. For many clients, however, 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 will risk in the event of a lawsuit. Talk to an estate planning attorney to determine what is best for your situation.