Is Asset Protection Worth It?

By Paul Deloughery, Esq.

September 2019

Short Answer:

If you have any assets that you don’t want to lose, then taking steps to protect those assets is worth it for you. The U.S. is a litigious society, and you don’t have to be guilty to be a victim. Investors and business owners often say that the first million was the hardest to make. If you are financially successful, then a better question might be, “Do you want to be wiped out (and have to start all over again) due to one poor decision?”

Introduction

As you tell from my short answer above, I don’t believe answering the “Is it worth it?” question is simply a question of math. It really depends on how risk adverse you are, and how much you value predictability and financial stability. If you own a major asset such as a car or a house, then it makes sense to most people to have insurance to protect against the possibility of fire or theft.[1] Similarly, if you believe you have other risks that can’t be insured against (such as the risk of being sued, getting divorced, or having an employee embezzle from you), then it also makes sense to take steps to protect against those losses.

Probably a better way to phrase the question would be: “What steps should I take to protect my assets, given my particular situation?” In order to drill down to the question of whether asset protection[2] is worth it for you, what follows is a list of questions to ask.

Factors to consider:

  • What is your net worth?
  • How much do you want to protect your wealth?
  • What is your career?
  • What other activities are you engaged in?
  • How risk adverse do you feel?
  • How easily can you make money again if you lose it?
  • Do you have other checks and balances in place to prevent losses? (For example, double review of accounting functions to prevent embezzlement, or reviews of investments to ensure you aren’t investing in scams.)
  • Does your family resolve conflict well? Or are you the “glue” that is holding your family together?
  • What is your chance of getting divorced?

We’ll discuss each of these factors in more detail below.

What is your net worth?

In a study from 2012 of U.S. households with $5 million or more in investable assets, 82 percent of the respondents believe their wealth makes them an attractive target for liability lawsuits “to some degree,” with 23 percent believing that their wealth alone makes them “very much” a target.[2] Only 6 percent stated that their wealth did not make them a target.[3]

You can see how ACE Private Risk Services rates your risk based on your net worth here.

How much do you want to protect your wealth?

The mean (average) verdict in tort cases tried to juries is roughly $2 million, according to a joint report by the National Center for State Courts and State Justice Institute. My personal experience as a lawyer is that people with less than $5 million are very concerned about losing $2 million. However, people with more than $5 million are less concerned because such a lawsuit would not “wipe them out financially”.

What is your career? What other activities are you engaged in?

Some careers are more dangers from the standpoint of attracting lawsuits than others. For example, more than one in three physicians, 34 percent, have had a medical liability lawsuit filed against them at some point in their careers.[4]  Nearly half of physicians 55 and older report having been sued, compared with just 8 percent of doctors younger than 40. [5]  Sixty-eight percent of closed claims were dropped, dismissed or withdrawn in 2015. Nonetheless, those claims still imposed an average of more than $30,000 in defense costs. [6]

Aside from your career, how many other exposures do you have?

  • How many homes, including apartments and condominiums, do you own for residential purposes?
  • How many swimming pools, hot tubs, ponds, and trampolines are on all your properties in total?
  • How many dogs, horses, or other large animals do you own?
  • Do you own vacant land or land (such as beachfront) to which the public has access?
  • Do you lease out any of your land for farming or agricultural purposes?
  • Do you lease out any of your land for hunting purposes?
  • Do you operate a business or side business that brings clients or customers to any of your homes or properties on a regular basis?
  • How many household staff do you employ more than 15 hours per week?
  • How many automobiles do you own?
  • How many people have regular use of your vehicles?
  • How many of the drivers are under the age of 26?
  • Do you rent out other properties you own?
  • How many small powered recreational vehicles, such as motorcycles, personal watercraft, ATVs, and boats under 40 feet in length do you own?
  • How many boats 40 feet or more in length do you own?
  • Do you or a member of your household have a prominent public profile?
  • How many family members actively participate in online social networks?
  • How many times per year do you host parties or events in your home numbering more than 25 people?

How risk adverse do you feel?

According to http://www.courtstatistics.org/, in 2016 there were:

  • 368,000 new cases filed in U.S. federal courts
  • 60,000 U.S. court of appeals cases
  • 795,000 new bankruptcy cases
  • 84 million new state court cases
  • 257,000 state court appellate cases

TOTAL = 85.48 Million New Cases in 2016

That works out to one new lawsuit every 2.7 seconds. [7] That’s truly a large number of lawsuits.

According to the Institute for Legal Reform, America has the costliest legal system in the world.

In fact, in 2016, costs and compensation paid in the U.S. tort system reached $429 billion. That figure was equivalent to 2.3% of U.S. gross domestic product, or $3,329 per household. This per household cost is even higher in certain states. The U.S. Tort System Is Hugely Inefficient in Compensating Victims. Not only do the high tort costs drain the U.S. economy, but America’s litigation addiction provides little redress for injured parties. Economists have found that only 57% of the money spent in the tort system in 2016 went to plaintiff compensation. And that’s before contingency fees by plaintiffs’ lawyers are subtracted.

If these statistics scare you, then perhaps it’s worth it for you to protect yourself.

How easily could you make the money back if you lose it?

We all have a limited amount of time and energy on this planet. Losing your fortune when you’re in your 20’s or 30’s stinks. But it’s not as depressing as losing it when you’re 60 and looking forward to retirement.

Do you have other checks and balances in place to prevent losses?

If you own a small business, do you have checks and balances in place to ensure your bookkeeper isn’t stealing from you? 80 percent of embezzlements occurred at small businesses (defined as those with fewer than 150 employees). And 30 percent of embezzlements involved a loss of more than $500,000.

Also, do you have safeguards in place to make sure your investment advisor isn’t running a Ponzi scheme?

Does your family resolve conflict well? Or are you the “glue” that is holding your family together?

A major source of loss for families is simply the process of transferring the wealth to the next generation. 70% of wealthy families lose their wealth by the second generation, and 90% by the third, according to the Williams Group wealth consultancy.[8]

Wealth transfers to the next generation can be much more predictable with (1) proper training and preparation of the next generation, and (2) proper documentation that provides a prescribed method of problem-solving and decision-making.

What is your chance of getting divorced?

The fastest way to cut your net worth in half is to get divorced. Of course, there are ways of preventing (or at least mitigating) this, such as premarital agreements. However, that also requires that you keep assets separated as originally intended. An asset protection plan, implemented either before you get married or with your spouse’s consent, can protect a substantial amount of your wealth in the case of a future divorce.

Why is America so litigious?

The U.S. tort system is driven by “no win – no fee” contingency plaintiffs’ lawyers, who get 30% to 50% of the money awarded in court. Such a system is not a uniquely American problem. (According to a 2004 book by law professor Herbert Kritzer, contingent fees were allowed as of that year in the following countries: AustraliaBrazilCanada, the Dominican RepublicFranceGreeceIrelandJapanNew Zealand, the United Kingdom and the United States.[4] They are also allowed in personal injury actions in Lithuania.) However, contingent fees definitely make it easier to file a lawsuit in the U.S.

Also, consider that the U.S. has the highest number of lawyers per capita compared to other countries. This results in there being more competition for work among lawyers. Which leads to more lawyers trying to figure out how they can get paid.

And THIS leads to something that isn’t taught in law school … but is taught in law firms … namely, how to search for a Fat Wallet Defendant. Contingency lawyers (“No Win, No Fee” Plaintiff Attorneys) get paid if they are successful, and if the Defendant has assets to pay. Winning a case against a homeless person doesn’t help them feed their own families. So they go after defendants who can pay. In other words, those with money in their wallet are the target even if they didn’t do it. It’s not the degree of fault but the ability to paid that counts more often than not.

Here is a really good example of that.

The Search for a Fat Wallet Defendant

Imagine Mr. Jones. Mr. Jones runs through a stop sign and severely injures Mrs. Wilson. At the hospital, Mrs. Wilson Googles local attorneys and calls the first attorney she sees who is attorney Goldberg. Now, attorney Goldberg is a contingency lawyer.
Mr. Goldberg then runs a search on Jones to ascertain his level of financial assets and finds nothing. So, is that the end of the potential lawsuit when the contingency lawyer’s client has these significant
injuries? Well, for a contingency lawyer, the answer is no. Here is how a successful contingency lawyer thinks to pinpoint their lawsuit victim.
  • First, they might ask whether Jones was on an errand for his employer at the time of the crash? If so, the employer could be sued.
  • Number two, did Jones have any alcohol in his system? The restaurant that served him or the bar he was in may have liability.
  • Third, was Jones on any medication? The pharmacist, drug company or physician may have potential liability for failure to provide proper warnings or for filing the prescription improperly.
  • Four, the stop sign Jones went through was in a residential neighborhood in front of someone’s house, did the homeowner properly maintain his property and clear his foliage to provide an unobstructed view of the stop sign? If not, there is a case against the homeowner for negligence.
  • Five, did the municipality take due care in the placement of the stop sign? Should it have used a traffic light instead? There might be a case against the city or county.
  • And finally, number six, the driver’s side door of Wilson’s car collapsed on impact. There is a possible case against the manufacturer for not making a more crash-resistant frame.
Now, if you look back at all these points, do you see how far we are moving away from Jones, the
person responsible for the accident in an effort to tie in a remote fat wallet defendant. You see, remember the system just isn’t fair. So,for example, the story I just shared with you was an actual case. And guess who ended up being the defendant?
Answer: 92-year-old Aunt Ellen. Aunt Helen had had a house that she owned and was in the bank, she was found liable on a theory called Negligent Entrustment. The verdict was nearly a million dollars. $932,000 was awarded against Aunt Helen and she lost nearly everything she owned.

$3.5 Million in Judgments And Still Could Move to New House

Here is a story that helps prove the value of Asset Protection. It’s about a lady who came to my law firm around 2005. More than ten years earlier, she and her husband had come to my former law partner (John Goodson) to implement an asset protection plan. At that time (in the 1990s) they owned some sporting goods stores in the Phoenix area. Afterwards, their business started having difficulty and it eventually had to close. There were unpaid creditors who filed lawsuits against the business and them personally. They filed for bankruptcy on their business, but never filed bankruptcy on themselves personally. At some point, the husband died.

Fast forward to 2005 when the wife came to the firm asking how she could sell her house and move closer to her son (so she could watch her grandchildren). You wouldn’t think this would be a big deal. But I failed to mention that she had around $3.5 million in judgments against her. Once a judgment is entered, it acts as a lien on any real estate owned by the judgment debtor in the county. Translation: If this lady sold her $700,000 house, all of the sales proceeds would go to pay off the creditors and she would get ZIP.

But, she had an asset protection plan. In her case, she and her husband had set up a Family Limited Partnership that had extended a line of credit to them, secured by the equity in their house. This was done BEFORE the lawsuits, so the FLP had priority for getting paid.

Result: The lady’s FLP foreclosed on her house, and then sold the house. The FLP then bought a house close to her son and she lived the remainder of her days being close to family. If she and her husband had not had an asset protection plan, she would have had to choose between being left alone in her house away from a son who could care for her in her old age, or letting it go to her creditors and moving into a small apartment.

COST

Now, let’s talk about cost. Asking how much an asset protection plan costs is kind of like asking how much a house costs. Houses vary widely in terms of features, size, location, and so on. Similarly, there is no single “Asset Protection Plan” that you can compare from law firm to law firm. For instance, getting $5 million of umbrella liability insurance will cost you around $500 extra a year. It’s a basic step in having an asset protection plan. Holding a one-hour safety program for your employees who drive company cars, and an additional one-hour program on sexual harassment prevention will cost you a minimal amount, but will go a long way to preventing possible claims. These are all forms of asset protection that any responsible asset protection attorney would suggest to you.

Also, there are widely different types of asset protection plans. Offshore asset protection trusts are very expensive – ranging from $30,000 to $50,000 to set up and $3,000 to $5,000 per year to maintain. They also have the risk of being held in contempt of court and thrown in jail if you eventually get sued and can’t bring the assets back to pay the creditors. You can read court opinions demonstrating the risks of offshore trusts here.

There are also something called Domestic Asset Protection Trusts. However, there are no court cases that say they actually work (unless you both live in a state that specifically allows them, AND you get sued in that state, AND the creditors don’t force you into an involuntary bankruptcy). A typical price for a DAPT is $10,000. However, considering that it will only work under ideal circumstances, that seems expensive for what you actually get.

An asset protection plan that would actually protect a physician or successful business owner will cost somewhere between $15,000 and $30,000. This will include an integrated plan with several legal structures such as an Asset Vault Trust and a limited partnership, together with loan documents and other crucial details. Most people with significant assets consider that cheap compared to the cost of losing half of their assets in a divorce, or getting hit with a $2 million tort judgment (as mentioned earlier on this page).

Footnotes

1: Most if not all states require drivers to carry mandatory automobile liability insurance coverage to ensure that their drivers can cover the cost of damage to other people or property in the event of an accident. Also, any home lender is going to require the homeowner to carry property and casualty coverage to insure against the risk of fire or other damage to the property that is securing the home loan. However, even if you were to live on an island where there were no laws requiring insurance, and your home was paid off, it would still make sense in most cases to have insurance.

2: Asset Protection can be defined as the organization of a person’s personal and financial affairs, well in advance of any threatened, expected or pending creditor claims, in order to shield the assets from future liabilities to which they may become liable. Success in the area of asset protection is measured by how much less a credit gets as a result of having implemented asset protection planning.

3: The issue of disparities in wealth, income, and taxation has become the subject of heated debate. As the controversy deepens and proliferates, newly released research by ACE Private Risk Services, the high net worth personal insurance business of the ACE Group, shows that many high net worth families are concerned this environment is heightening the risk they will be the target of a high-stakes liability lawsuit.

Their wealth, they increasingly fear, can attract lawsuits. Aside from the financial impact, high net worth individuals fear the stress of protracted legal proceedings and risk damage to their reputations and ability to earn an income.

Read the white paper to learn more about the threat to families with emerging and established wealth.

4: Id.

5: Read the January 26, 2018 article entitled “1 in 3 physicians has been sued; by age 55, 1 in 2 hit with suit” by the American Medical Association here.

6: Id.

7: Id.

8: According to Annie E. Casey Foundation .LINK TO https://datacenter.kidscount.org/data/tables/99-total-population-by-child-and-adult#detailed/1/any/false/37,871,870,573,869,36,868,867,133,38/39,40,41/416,417 there were an estimated 249,421,641 adults in the U.S. in 2016. (It is unknown how many of these were illegal immigrants vs. citizens and persons in the U.S. legally.) Therefore, based on these numbers, there was one lawsuit for every 2.9 adults in the U.S. in 2016. There is no reason to believe that that figure has not changed significantly since 2016.

9: I question how academic or scientific the Williams Group study was. Any study that simply provides round numbers like 70% and 90% is unlikely to have been conducted very precisely from statistical standpoint. However, no one else has apparently studied this issue, so this is the only study that can be cited.