Bad news: A lawsuit is filed in every 30 seconds in the United States, and one in ten adult Americans is sued each year. Worse news: If you are reading this and have assets, are a business owner or in a target-rich profession (e.g., physician), then you have a bulls-eye on your wallet.
By and large, the general public thinks you are targets of opportunity (with extremely fat wallets). Unfortunately, trial attorneys know you are. And the trial lawyers I know never drill a dry well. Join me as we consider two fundamental sources of lawsuit exposure, correct a common misconception, and introduce some practical steps to take now to protect your wallet later.
Lawsuits can threaten your wallet via upstream and downstream exposures. An upstream exposure is when a lawsuit flows from an asset to you as an individual. For example, a trial attorney* slips and falls on the icy walkway of your lake home while leaving your holiday open house. She has a bruised coccyx and related soft tissue injuries, requiring extensive rest, massage therapy (with spa treatments), and time away from work. On the other hand, a downstream exposure occurs when a lawsuit flows from you as an individual to an asset. For example, you run a burnt-orange light and hit a bus full of, yes, you guessed it, trial attorneys* on their way to the state bar conference. Amazingly, every last one of them has whiplash, requiring extensive rest, massage therapy (with spa treatments), and time away from work.
Many people have created Revocable Living Trusts as part of their estate planning to minimize exposure to probate and estate taxes. They are wonderful legal tools for such purposes. However, the fact they are revocable by the parties who establish them renders them ineffective for asset protection purposes.
There are practical, common-sense steps you may take to reduce or eliminate your liability exposure. For instance, you may prevent that slip and fall at your lake home by keeping snow off the walkways, by using plenty of ice-melt, and by removing trial attorneys from the invitee list. Similarly, by driving a little slower and by stopping for yellow lights, you may prevent that automobile-bus collision.
Would your home survive a major lawsuit? It depends. Some states, like Kansas, have homestead laws that would protect the entire value of your home (once you have lived there for 1,215 days). If you a Missouri resident, are married and own your home (and any other assets) jointly with your spouse in Missouri, then the magic of "Tenancy by the Entirety" will protect your home (and other jointly titled assets) from the liabilities of one spouse. In the above example, this form of ownership would offer asset protection as a result of the automobile-bus collision, but not the slip-and-fall. The laws of other states, however, may offer little - if any - protection for your home. Accordingly, check whether your state laws would protect your home. While you are at it, check whether they would protect your retirement funds, life insurance, and other assets, too.
It is illegal to give away your assets when a lawsuit appears on the horizon. Period. Nevertheless, some physicians have lawfully transferred ownership of substantial assets to trusted family members and friends outside the reach of trial attorneys. Even so, this practice is not without risk. For example, consider the physician who transfers substantial assets to her safe spouse only to have him run into a bus full of lawyers. Note: Lawsuit lightening can strike anyone!
Danger! Joint Tenancy ownership of assets can exponentially multiply your lawsuit exposure through the acts (or omissions) of another joint tenant. For instance, your son buys a car and you co-sign for the loan. If your name is on the title as a co-owner/co-obligor when your son runs into a bus full of trial lawyers*, then you will be named in the lawsuit. Not good. On the other hand, as noted above, joint ownership between spouses in states like Missouri may be a really good thing. In Missouri such ownership is called Tenancy by the Entirety and each spouse is deemed to own 100% of the whole asset held jointly. Accordingly, a lawsuit against one spouse cannot threaten the 100% concurrent interest of the other spouse.
You may want to consider creating various asset protection legal entities to shield assets from upstream and downstream exposures. Using the aforementioned lake home as an example, if you were to create a Limited Liability Company to hold title to it, you may be able to limit your upstream lawsuit exposure to the value of the lake home itself. Similarly, using the aforementioned bus collision as an example, you may be able to negotiate a settlement for less than the value of the lake home by making the Limited Liability Company an "unattractive asset" for the trial lawyer due to various control limitations and transfer restrictions.
Are you anticipating an inheritance, or are you planning to leave an inheritance? A savvy way to protect an inheritance for an heir is to keep it in a long-term discretionary trust with spendthrift provisions throughout his or her lifetime. Otherwise, if your parents left an inheritance outright to you, then it would be available outright to trial attorneys, too. These inheritance arrangements can be created under a Last Will and Testament or a Revocable Living Trust.
This has been a brief overview of an extremely complex subject. Remember: Take no action without consulting qualified legal counsel. The appropriate application of relevant laws will vary depending on the unique facts presented.
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*Note: No trial lawyers were injured in the writing of this article.