Asset Protection: What You Must Know

This asset protection article was written for the readers of The Florida Healthcare Law Firm newsletter. If you have questions about asset protection, please call The Florida Healthcare Law Firm at (888) 455- 7702 or call me, Michael Wayne Patton, directly at (850) 803-1166 . . . .

The New American Dream

There is a New American Dream spreading across the nation. Achieving this dream has nothing to do with education, hard work, ingenuity, or taking smart risks. No, the New American Dream is based on a sense of entitlement or a feeling that one is a victim, and the road to achieving this dream is paved with lawsuits.

If you are a medical professional, an entrepreneur, or a business owner with employees, you are at risk of being targeted in a lawsuit. The more successful you are, the higher your risk. So how can you protect assets from lawsuits?

Two Systems of Asset Protection

Like the tax code, there is a system of asset protection for the informed, and there is a different system for the uninformed. The informed system of asset protection begins by asking “Which of my assets are in need of protection?” and “What do I want out of my assets?”

To answer the first question, you need to do an analysis of your assets to determine (i) which ones are actually assets (i.e. which ones have enough equity to make them worth protecting), and (ii) which ones are not already protected as exempt assets (e.g. homesteads in Florida and Texas have automatic asset protection).

The second question–“What do I want out of my assets?”–might seem a little bit confusing, but most of my clients boil it down to a few things:

  1. Control of the assets. Ability to decide what, when, where, and how assets are used.
  2. Legacy, or the right to designate where assets go when you die.
  3. Leverage, or the ability to sell, transfer, or mortgage assets and turn them into cash today.

Notice that “legal title” isn’t on the list. Asset protection is about separating control and use of assets from legal title to the assets. That way, if you get sued personally, your assets are off limits, since the legal system can only take assets from you if you hold legal title. The legal system cannot take away your right to control and use assets. 

The Key To Protecting Wealth

Asset Protection Trusts are designed to give you maximum use and control of your assets while separating legal title from your potential legal exposure. It is the ultimate form of diversification and wealth protection, and the good news is that your assets can, for the most part, stay right here in the United States and remain under your full control.

If you would like to learn more about setting up an asset protection strategy, please call me today at (850) 803-1166 or email me directly at Wayne [“at”] I normally charge $279 for a consultation and asset protection analysis, but if you mention that you found this article through the Florida Healthcare Law Firm newsletter, I’ll waive that fee and speak with you for free.

Asset Protection And The New American Dream

The New American Dream

In case you haven’t noticed, there is a New American Dream. This dream isn’t the one instilled in us by our parents and grandparents. It isn’t what Nathaniel Hawthorne was likely talking about when he wrote that “Families are always rising and falling in America,” even though this dream does enrich some at the expense of others. The New American Dream isn’t a reward for educated risk-takers who use ingenuity and elbow grease to carve success for themselves.

Nor is this New American Dream rooted on the Puritan ethic embodied in Captain John Smith’s “He who does not work, will not eat.” It isn’t based on ingenuity or “working smarter” either.

No, the New American Dream is an insidious epidemic. It’s a free ride for the people who achieve it, but the toll exacted from the people who pay for this dream–the families that are “falling in America”–is enormous. The new American Dream is to become wealthy by lawsuit. The idea is to take from those who have achieved and give to those who are “victims.”

Does that sound ridiculous? Well, it should sound ridiculous. I certainly think it’s ridiculous, but no matter what any of us think, no matter how strongly we subscribe to traditional notions of achieving success, we must out of necessity act to protect ourselves against lawsuits. To really understand the need for protection against this New American Dream–the need to protect your assets against lawsuits–you need to understand the mentality of people who file lawsuits and the strategies pursued by the attorneys they hire.

What Does It Take to Achieve The New American Dream?

Not much. You and I know that self-development takes hard work, discipline, and dedication. Sadly, the reason so many people pursue the New American Dream is that it’s easy. Doesn’t it seem that more and more people are just interested in getting by these days? Many people are happy just to survive while leaving all the hard work to someone else. These people aren’t interested in self-development or growth. They have a sense of entitlement or a belief that they are victims. There are a lot of these people, up to 47% of the U.S. population if you take Mitt Romney’s word for it (recently named Quote of the Year for 2012 by Yale University), though the issue isn’t political at all.

Within this group, there is a certain subset that follow the New American Dream by looking for lawsuit windfalls.

All one needs is a sense of entitlement or the idea that a wrong has occurred and a target to sue. We all know that you can’t turn on the television or drive five miles on practically any major road without having a personal injury attorney advertisement tell us precisely that: “YOU have been wronged, and YOU are entitled . . . .”

After that, the task is simple. Sit back, let the plaintiffs’ lawyers do their thing, and collect a judgment or settlement.

Asset Protection For The Informed

Like most things in life, there is more than one solution to this problem. One idea is to reform the legal system in various ways. For example, we could institute a “loser pays” rule and eliminate contingency fees (e.g. attorneys who take a percentage of winnings in lieu of fees). Of course, since legislative bodies can’t seem to agree on anything these days, the idea of reform does little to protect your wealth today, and the powerful trial lawyers lobby works hard to make sure that meaningful legal reform never occurs.

So what can you do?

I believe there are two basic systems of asset protection. There is one system for the uninformed which says “just carry insurance,” and there is a completely different system for informed people who have been taught about wealth preservation and asset protection by virtue of coming from multi-generational wealth.

The good news is that you don’t have to be ultra-wealthy in order to take advantage of the “informed system” of asset protection.

Does Insurance Offer Asset Protection?

Yes, insurance does offer a limited form of asset protection, but it has flaws and can actually work against you. Think of the following:

  • Insurance can, in fact, encourage suits against you, because plaintiffs’ attorneys see an easy pot of money from which to collect. Asset protection, on the other hand, discourages lawsuits and creates incentives for plaintiffs to settle for pennies on the dollar, since even a victory in court doesn’t guarantee they’ll collect winnings.
  • Insurance only covers you for specified occurrences. It doesn’t cover you outside of carefully defined circumstances, so the moment you’re sued, the insurance company may stop “batting for you” and start look for reasons to deny coverage.
  • Insurance requires annual premiums, whereas asset protection is a one time investment that can last several lifetimes.

That said, I do always encourage my clients to carry a reasonable amount of insurance for the liabilities they are most likely to face. The reason is simple: Insurance companies will pay for your legal defense (though with good asset protection planning you may choose not to defend at all)! The cost of defending against a lawsuit can be absolutely mind boggling. Besides that, the existence of a policy with a reasonable (rather than the highest) coverage limit may encourage a plaintiff’s attorney to settle for the “sure thing” rather than risk going to court.

Proactive Asset Protection

Your assets are protected when you’ve taken advantage of all the legal tools available to you before a creditor claim arises or a lawsuit is filed. In many cases, if a lawsuit has been filed (or even threatened), it’s too late for asset protection.

Some asset protection is automatic. In Florida or Texas, for example, a homestead is practically always off limits. Assets that are automatically protected are called exempt assets, and we’ll talk more about them in future articles.

Another form of asset protection is debt. Yes, you read that correctly. A home valued at $1,000,000 with an outstanding mortgage of $800,000 only has $200,000 of  equity in need of protection. In other words, to adequately protect yourself, you need to understand what is and what is not an “asset.” Assets with equity are often times in need of protection (unless they are exempt assets), but many times assets are so encumbered by debt that they provide their own unique form of asset protection, even though you have full use and control of the underlying assets.

That brings up an important point. Use and control of assets, without technical legal ownership of the assets, is the key to protecting wealth.

Asset Protection Trusts

The goal of any asset protection plan should be to reduce your lawsuit profile and eliminate the possibility of creditor claims, whether from litigation, guarantees on business loans, or most other types of liabilities. Plaintiffs’ lawyers are highly attracted to wealth, so the best way to reduce your profile and ward off lawsuits is simple: Don’t own anything!

If you don’t own anything, what can your creditors take away from you? NOTHING.

This might sound absurd, but think about what you really want out of your assets:

  • Control – The ability to do what you want with those assets when you want to do it.
  • Use – What’s the point of having assets if you can’t use them?
  • Legacy – The right to designate where those assets go when you die.
  • Leverage or Liquidation – Use of the assets to purchase other assets, secure loans, or the ability to sell them outright.

If you could have all of the above but not legal title, would you lose much sleep? Probably not. My clients actually report sleeping much better at night after creating an asset protection plan!

The good news is that you can control and use your assets while shielding them from creditor claims!  The legal tool that we use to achieve this is called an asset protection trust.

If you would like to learn more about setting up an asset protection strategy, please call me today at (850) 803-1166 or email me directly at Wayne [“at”] I normally charge $279 for a consultation and asset protection analysis, but if you mention that you found this article through the Florida Healthcare Law Firm newsletter, I’ll waive that fee and speak with you for free.

Protection from Lawsuits Part I

Protection from LawsuitsIn this three part series, I’m going to analyze ways in which you can insulate your assets from the legal system.  Part I (this article) will discuss why it’s important to be “judgment proof.” Part II will delve into different types of assets that need protecting. Part III will bring everything together in terms of establishing a plan.

Protection from Lawsuits

What is the best way to discourage a plaintifs’ attorney who works on contingency fees? The most effective method is to make sure you’re overlooked by them. Not having any assets is one way to make sure that happens. In the legal community, people without any assets are called “judgment proof.” Being judgment proof is an excellent way to protect assets from lawsuits. Attorneys want to make the easy money. They don’t want to waste time pursuing defendants that will be unable to pay.

Remove the Contingency Fee, Remove the Incentive to Sue

Again, most plaintiffs’ attorneys work on contingency fees. You’ve seen those guys on T.V.: “We don’t get paid unless you collect!”

Personal injury and malpractice attorneys do not receive upfront retainers from clients. They don’t bill by the hour either. The only way these lawyers get paid is by winning or settling cases and collecting. If a plaintiff’s attorney loses a case, they get no compensation and are often “out” the expenses of litigation (e.g. court costs). The same thing happens if they win but can’t collect.

It’s obvious that personal injury and malpractice claims attorneys must evaluate several factors when deciding whether or not to take on a new case. First, they must determine the likelihood of establishing liability (i.e. winning the case). Second, they have to determine if the defendant will be able to pay.

The defendant’s ability to pay is a critical factor. If a potential defendant is judgment proof, then they are not considered an easy target.  As the saying goes, “If you’ve got nothing, you’ve got nothing to lose.”  Pursuing a course of litigation against a judgment proof defendant would be a waste time and money for most personal injury and malpractice attorneys. Even if liability can be established, there is no way to collect. If there is no way to collect, there is no way to get paid. It’s that simple.

It’s All About the Money

Plaintiff’s attorneys are in the game to make money. It would be an absolute anomaly to see a lawsuit filed against a business or individual that does not have assets and the ability to pay.

The takeaway is that being judgment proof provides an excellent form of lawsuit protection for your assets. It’s an easy way to deter litigation. How this applies to a person with significant assets will be discussed in the third part of this series.

If you’d like to learn more about asset protection planning
, please call us today. Mention this article or that you found us through the Florida Healthcare Law Firm, and we’ll waive our customary $279 analysis fee.