We live in a litigious world. People and small businesses get sued all the time.
This is likely to worsen in the decades ahead, as the wealth divide – the gulf between haves and have nots, and the income delta, the increasing concentration of income and wealth in the hands of a relative few, like those reading this blog – grows and expands.
Are you rich enough to sue?
Most of these reasons are obvious from reading the press and other media, but even 1%-ers typically don’t feel very rich.
So here’s a litmus test to drive the point: According to data from the Federal Reserve’s 2022 Survey of Consumer Finances, the average 65 to 74-year-old has a little over $426,000 saved.
And, of course, there are much poorer folks, desperate and lacking alternatives, becoming more inclined to sue. Then add the gasoline vapor on the political wind becoming more inclined to judicial remedy and defendants’ rights.
Never before has the threat of losing wealth to lawsuits, creditors, or other financial predators been greater. And make no mistake, if you are attacked, you can’t hide your real wealth, unless it’s gold bars in cement underneath Jimmy Hoffa.
How much financial information about you can financial predators find?
You get sued, you gotta turn over your records. It’s called discovery. Watch My Cousin Vinny, for gosh sakes. Try to hide it or lie about it or transfer it to your sister, and not only will the judge probably find out about it, but she’s likely to get very pissed, and undo the transfer as a fraudulent conveyance.
Never before has it been as easy for predators and their attorneys to gauge your net worth, and discover what hole(s) conceal your treasure. Services like Wealth-X (wealthx.com; based in Singapore) have for years used internet scraping to compile “dossiers” on fat cats like you, and sell the information to all comers, no questions asked.
The advent of AI will just hockey-stick this trend.
Never before has our wealth been so easy to find and see, and so easy to attack. With the dizzying proliferation of information technology, this problem will only become more acute as time passes.
Asset protection – the art of owning nothing and controlling everything
So burn this into your brain: Asset protection is the art of fortifying our wealth so that it becomes extremely difficult or impossible to extract. It is the art of controlling everything and completely “owning” nothing.
The two phases of asset protection
There are two basic levels of asset protection planning.
Liability insurance is the first line of defense
The first and most basic is making sure there are adequate levels and types of liability insurance. It is important to make sure there are no gaps, and that all exposures—businesses, real estate, and personal (including vehicles, boats, planes, etc.)—are covered for all exposed individuals and assets. Miss this, and you have a soft spot in your armor leading right to your honey pot.
Usually, umbrellas (both personal and business) are used to extend the liability limits of underlying policies, and should be maintained at levels keyed to a family’s net worth. It is important to be sure that underlying policies and umbrellas are properly structured so that there are no gaps, and this should be regularly reviewed with an agent or financial planner expert in these areas. But this is just the first fence. The insurance company could walk away from the claim, leaving you naked (unlikely but possible), or the judge could award more than the insurance will pay.
Just insurance may not be enough to protect your assets
Here in lil’ ole’ Jacksonville, I like to use the example of getting in a wreck with a Jacksonville Jaguar. Hit a key player making tens of millions, and the ambulance chasers are gonna come a-callin. Got a $5M umbrella! Great. Pay him $10M. What if you fail? You go to jail! Not really, but that’s what you get for making whoopee. Sorry, I wandered off. Anyway, no discounts for helping to put a hopeless team out of its misery!
Asset protection structural planning is the second line of defense
The second level of planning is structural and involves how assets are titled and in what types of entities.
Tenancy by the entirety instead of joint with right of survivorship for married couples
For instance, a very simple tactic for married people in states (like Florida) that allow it is using tenancy by the entirety instead of the far more common joint tenants with right of survivorship—at least both spouses would have to be successfully sued to lose the wealth, instead of just one. This is strong if only one spouse gets sued, but worthless otherwise – like if he is driving your car.
By the way, we find most brokers and banks are clueless – or just don’t care! – about giving you this little bit of free asset protection. Demand it! Beware the ubiquitous JTWROS!
IRA’s and retirement accounts generally enjoy asset protection
But a little bit of work will pay off in far more effective planning. For instance, assets in qualified retirement plans, or in IRAs, can enjoy far greater attack protection than those in individual or joint accounts.
Asset protection family holding companies – charging order protected LLCs
Using LLCs (Limited Liability Companies) with the right ownership structure and the right operating agreement provisions in the right States (these three are critically important and often gotten wrong) can offer tremendous protection for passive assets like bank and brokerage accounts, for operating businesses, and for real estate holdings (just be careful not to mix the asset types! Putting the right eggs in the right baskets is of supreme importance! That $2M brokerage account in the same LLC as the house that burns? It’s all gone…).
LLCs have to be set up right for asset protection to work
The tremendous asset protecting power of proper LLCs over corporations is something we frequently see business owners – and their lawyers! – missing, to their peril. Just these simple, basic steps—and they really are quite simple for clients to implement, so long as they have expert guidance—can solve most folks’ asset protection needs. For the more complicated, advanced techniques like equity splitting (where we separate various parts of a business into different companies, to make the whole harder to grab), trust layers, and using “foreign” (out of State) and “alien” (non-U.S.) trust and companies layering can make it so hard and expensive to chase your assets that even the most implacable adversary will give up, or settle for pennies. But most of the time, that’s way overkill. Use the right LLCs is typically plenty. Did I mention getting it right is hard to find?
Finding the right advisors for asset protection is critical
Getting this right is dicey. Like for tax and estate planning, it is worth paying for six-sigma advisor quality. All the stars need to line up – right secret sauce in the operating agreement, right assets and right silos, right ownership structure, and so on. For instance, Florida has a very strong LLC law for asset protection. Georgia’s is nearly worthless. And no, Virginia, you don’t need to be a Florida resident to make it work. But you do need someone who knows precisely how to write the sonnet, and tether it to Florida, and few do. But well-written, and they’re nearly bazooka-proof.
Two-pronged asset protection strategy
So the de rigor of asset protection planning is a two-pronged strategy. One problem is using cheap (compared to your wealth) insurance to encourage attackers’ lawyers to take the quick and easy money (and legal fees), settle any claims against you, and leave you alone. The second prong (by far the sharper one) is using entirely legal structures to make it so difficult, expensive, and time consuming to pursue claims against your assets, that they just don’t. In a nutshell, you map out a path of least resistance before any trouble arises, and, if it does, the predators slide down the path that leads away from your treasure.