We live in a “lawsuit happy” society. Attorneys advertise on billboards with slogans such as “Have You Been Injured? You May be Entitled to a Cash Award!” Nobody wants to accept responsibility for their own actions. Everybody is a victim.
It's sad but true… when you build wealth and get rich, you become a target of lawyers, the IRS and everyone that has less than you. It's not what you make, it's what you keep! But how do you keep it in today's lawsuit-crazy world?
I became involved in wealth protection around 1990. Many of my clients were real estate investors that were running from creditors after the real estate and stock market crashes in the late 1980s. They came to me for help in holding off the creditors, foreclosures and lawsuits. Unable to recover financially, many of them lost all of their assets and filed for bankruptcy protection.
The clients that made it through the crunch taught me a thing or two about financial survival. They were smart enough to arrange their business affairs in case of a crash. Nobody thinks about bankruptcy, business failure, lawsuits and financial distress when times are good. However, as you will discover in this report, it is the most important time to think about it! You must have a plan for your wealth or you will be destined to fail at this game we call “wealth preservation.”
A Nationwide Epidemic
Eighty million lawsuits are filed every year, an average of 152 per minute. The chances are greater that you will be sued than be in the hospital in the next year. The United States has 70% of the world's lawyers, and almost fifty-thousand new law school graduates are entering the profession each year! More lawyers means more competition for clients and that leads to new and creative theories of liability.
So when is the best time to start planning for a lawsuit? Before you get sued, that's when! You cannot wait until you are sued to start moving around your assets. “CYA” does NOT mean “call your attorney.” Lawsuit and asset protection is preventative maintenance. Nearly every state has some form of law that prohibits “fraudulent conveyances.” A conveyance of property is fraudulent if it is intended to “delay, hinder or defraud” creditors. The law gives creditors the right to ask a judge to put the property back into your name so your creditors can take it away from you. So if you're thinking about transferring title to your house to your spouse when you get threatened with a lawsuit, think again!
You can take some simple steps to reduce your risk of lawsuits and reduce your potential exposure to judgments. I call these steps “the ABC's of Wealth Protection.”
“A” — Avoid Lawsuits & Personal Liability
At the risk of insulting the reader's intelligence, the best asset protection strategy is… DON'T GET SUED! I know this one is obvious, but some people just don't think about the potential liability they create when operating their affairs. It's called the “Ostrich Syndrome.” Some people just stick their head in sand and pretend it won't happen to them. I want to give you a set of tools and a way of thinking that minimizes your risk of liability.
The most obvious way to reduce your risk of liability is to stay home and watch television. That is not a realistic approach to life. However, being an “ostrich” is not a great way to live either. Somewhere in the middle there is a point in which you will be comfortable knowing that you are acting aggressively, yet intelligently.
Even if you cannot avoid lawsuits, you can avoid being hit personally. This topic deals with lawsuit protection. If you do business in your own name, then you will get sued personally. If you sign obligations personally, then you are on the hook. Arrange your business affairs so that when things go bad, you are not personally on the hook. Use corporate entities to do business so that you have a layer of protection between you and the liabilities your business creates.
“B” — Appear Broke
When I was first out of law school, my colleagues taught me how to carefully draft my documents so that all of my clients' rights would be protected. I used to love negotiating real estate contracts, because every lawyer had at least a ten-page addendum of items that he or she insisted upon (that's why real estate brokers call lawyers “deal killers!”).
After a while, reality sank in. The reality is that no matter what the paperwork says, the person who loses his money will sue those who walked away with his money. So after being involved in a lot of litigation over real estate and business disasters, I discovered a universal truth…
PEOPLE ONLY SUE OTHER PEOPLE WHO HAVE MONEY!
It's true, isn't it? Nobody is going to sue you if they think you have nothing upon which to collect. This fact is especially true if someone retains a lawyer on a “contingent-fee” basis (i.e., the lawyer's fee is contingent upon his ability to collect).
Let me give you a typical scenario of what happens in the lawsuit arena. Peter Plaintiff has a gripe against Donald Defendant. Peter thinks that he should be able to collect. He goes to an attorney and is advised that he has a great case and the lawyer asks Peter for a nonrefundable $5,000 retainer to be applied toward the lawyer's regular hourly fee of $200. Like most people, Peter cannot afford the lawyer's fees, so he leaves the lawyer's office feeling dejected. Peter continues his search for a more affordable lawyer, and while thumbing through the Yellow Pages, he sees a full page like this one:
Has Someone Injured You? Car Wreck? Dog Bite? Mosquito Bite?
Call 1-800-LET'S SUE
We'll Get You the Money You Deserve!
Peter goes to Larry Lawyer for a free consultation. He tells Larry Lawyer his story. Lawyer knows that Donald Defendant's insurance won't cover the claim, so he needs to find a “deep pocket.” After all, what good is a judgment if he can't collect?
Mr. Lawyer begins to ask Peter about Donald Defendant's assets. Peter tells Lawyer about Donald's successful business and stock market holdings that Donald always brags about. Peter also suspects that Donald owns a large apartment building across town. Lawyer jumps on the Internet does a little digging in the public records. Lo and behold, they find that Donald Defendant owns millions in real estate! It looks like Larry Lawyer has a pot of gold waiting at the end of the rainbow, so he takes the case on a contingent-fee basis (i.e., Peter Plaintiff pays nothing up front and Larry Lawyer collects his fee as a percentage of what he collects from Donald Defendant).
What if Peter Plaintiff knew nothing about Donald's assets and a search of the public records came up empty? In that case, Larry Lawyer would probably ask Peter for a $5,000 retainer or tell him politely to “hit the road!” Lawyers don't like taking cases on a contingent-fee basis unless they have a guaranteed way to collect the judgment. Contingent-fee lawyers don't get paid to sue. They get paid to collect! Peter Plaintiff is out of luck.
“C” — Control, But Don't Own
John D. Rockefeller once said, “Own Nothing, Control Everything.” If you don't own anything, you have nothing to lose. Do you think Donald Trump has a bank account with several million dollars in cash? I doubt it. Even during the crash of his real estate empire he was clever enough to retain some control over cash flow and retain his flashy lifestyle. All the banks had to renegotiate with Trump. He was too resourceful to let go of all of his holdings.
So what we need are some “flunkies” to do our dirty work and take the fall. We call those:
- Limited Partnerships
- Limited Liability Companies
I want to make it clear at this time that I do not advocate that you break the law. In fact, I am advocating the exact opposite… I want you to follow the law in a way that benefits you. The law is on your side if you know how to use it.
I also want to make it clear that this is not a treatise on estate or tax planning. The strategies discussed herein are not necessarily intended to minimize your income tax or estate tax obligations. For example, having your spouse own all of your property may prevent you from losing it all in a lawsuit, but you lose the benefit of passing that property through your estate without paying federal taxes. There is, of course, a tradeoff sometimes between lawsuit protection and tax savings.
Wealth protection, tax planning and estate planning go hand-in-hand if you utilize the principles properly. As with any estate or tax plan, you should seek competent, professional legal and tax advice before undertaking any of the ideas suggested in this article.