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 (877) 727-1092 or email me directly at Wayne [“at”]

Tenants by the Entireties: A Viable Asset Protection Strategy?

In Florida, the answer is “YES.” Tenancy by the entirety is alive and well in Florida asset protection law.

Some other states recognize the common law asset protection doctrine of tenancy by the entirety too. Tenancy by the entirety is a form of ownership that, as a matter of law, can only exist between a husband and wife when they opt for it. The other attributes of this form of ownership are the concepts of common time (i.e. it can only exist during the marriage), right of survivorship, and undivided interest.

These attributes basically mean that married couples own their property “together,” in every sense of the word.  And if one spouse dies, the other spouse automatically takes sole ownership of the property, but that ownership is as an individual. The tenancy and all of its benefits disappear when when one spouse passes on.

Tenants by the Entireties: The  Asset Protection Benefits

With respect to asset protection planning, a tenancy by the entirety provides a lot of protection while the tenancy is in place. Neither spouse acting alone can transfer property out of a tenancy by the entirety. Rather, the consent of both spouses is required. That feature provides “built-in” asset protection. If one spouse is sued or incurs a liability of (almost) any kind, assets held in a tenancy by the entirety are exempt. They can’t be accessed to satisfy a claim that exists just one spouse.

Using Tenancy by the Entirety for Asset Protection

In families where both spouses work, a tenancy by the entirety can be used to protect those cash. That can be done by having separate incomes deposited into a bank account that’s owned by the married couple as tenants by the entirety. This method is especially effective in households where one spouse is a physician, dentist, or lawyer in a state where profits can only be shared with other licensed professionals (e.g. Florida attorneys). Income from the professional practice can be protected against potential malpractice suits by having it deposited into a tenancy by the entirety account. But there is a catch: You have to be consistent. It simply won’t be effective if you wait until a lawsuit or other claim is asserted before you begin, or a judge might just decide to “undo” your efforts. For regular paychecks and profit distributions, it makes sense to consider having income direct deposited into a tenants by the entirety bank account. That makes the protection automatic.

Where It Doesn’t Work To Protect Assets

Tenancy by the entirety is a weak form of asset protection in some scenarios. One obvious weakness is that property held in this form of ownership is accessible by a married couple’s joint creditors. So if you both “signed on the dotted line” for that loan that’s now going bad, T by E probably isn’t going to offer very much protection. Property also loses the protections if a couple divorces and/or upon the death of a non-debtor spouse (i.e. the death of the spouse who is “free and clear”). Also, in order to take advantage of a tenancy by the entirety in bankruptcy, a couple would have to to opt for state exemptions rather than the federal exemptions, because the doctrine of tenancy by the entirety simply isn’t recognized by the federal bankruptcy code. To overcome these weaknesses, it’s a good idea to use a limited liability company, in addition to tenancy by the entirety. That way your bases are really covered.

You can find of list of states that recognize the doctrine of tenancy by the entirety here (though I can’t vouch for its accuracy or when it was last updated).

If you have questions about tenancy by the entirety and want to know if it’s available in your state, please call us today. We’d be happy to spend some time discussing it and your other asset protection questions. If you want to learn more about the legal doctrine tenancy by the entirety in general, check out this very helpful paper written by a bankruptcy judge: Tenancy by the Entirety in Bankruptcy or click here to download the paper.

Asset Protection and Wage Garnishment

One question I encounter quite often is what happens to my earnings (i.e. wages) if a judgment is entered against me? It’s a great question, because even if the bulk of your assets are protected, income can still be intercepted . . . in some circumstances. I want to address Texas and Florida asset protection laws as they pertain to garnishment of wages, because I have a lot of clients in those two states.

Texas and Florida

A writ of garnishment is a legal remedy that courts (outside of Texas) grant to creditors allowing them to collect a certain portion of a debtor’s wages or other income in an effort to satisfy outstanding judgments. For example, if your wages are garnished, then your employer would actually be ordered by the court to convey a portion of your paycheck directly to your creditors. In short, garnishment can be a harsh remedy, and it can have devastating consequences for people who rely on their income to meet daily needs.

Texas law does not have a mechanism for garnishment. In short, creditors have no way to garnish or otherwise intercept wages or other types of income from debtors located in Texas.  It is possible that a creditor could attempt to intercept a federal tax refund, but that is a long shot in most circumstances.

Florida Asset Protection

Unlike Texas, Florida does allow courts to issue writs of  garnishment. This means that debtors (i.e. individuals with judgments against them) in Florida need to plan for the possibility that some of their income may be intercepted. Despite that possibility, Florida asset protection law does make one notable exemption to a creditor’s right to garnish wages. This exception is called the head of household exemption.

If you are the head of a household in Florida, then your wages are “off limits” and cannot be garnished.  In this context the term “head of household” is more of a family definition. In other words, it doesn’t relate to where one lives or with whom but, rather, refers to an individuas support obligations. One can be the head of a household so long as she or he has a legal or moral support obligation for another person such as child, spouse, or parent. The supported person does not necessarily need to live in the same house or reside with the head of household (e.g. many parents have primary financial support obligations for children even though they do not have primary custody of the children).

Federal Garnishment Limitations

In addition to Florida’s state laws that limit garnishment of wages, there are many federal limitations on the amount of wages that can be garnished. Federal law limits garnishment to the lesser of (i) 25% of an employees disposable earnings or (ii) the amount by which disposable earnings are greater than 30 times the national minimum wage. Disposable earnings are basically equal to take-home pay. So, if you’re a high income earner, garnishment can have teeth.

To some extent, asset protection planning can help with the issue of garnishment, especially the use of offshore trusts. But truthfully, the best plan of attack is to set up your business so that you can control your wages. That way you can lessen the severity and impact of wage garnishment on your life.

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.