- Personal Finance
Asset Protection - High Net Worth Individuals Should be Judgment Proof - See What O. J. Simpson Learned
All physicians, business owners, professionals or just ordinary individuals should have a basic understanding of asset protection and follow a basic asset protection plan. Whether you are a high net worth individual, worth millions, or a struggling American, worth just a few thousand dollars, you can easily protect yourself so that creditors cannot reach your assets. If someone says, "I'll sue you!" you just laugh!
The information in this blog is intended to start the reader thinking about asset protection and to encourage discussions on the Internet. This is not intended ant to be legal or tax advice. The author is not a lawyer and is attempting to share with you some of the things that he as learned during his 40 plus years of experience. Any reader who uses this article should independently verify the information with a skilled lawyer who specializes in debtor-creditor law. Hopefully this article will help you determine what questions to ask yourself and possibly your lawyer.
Most Americans think that their insurance is sufficient to protect their assets, but often insurance does not cover things like lawsuits for environmental damages, discrimination claims, gross negligence, punitive damages, palimony awards, acts (including paternity suits) committed by your minor children, breaches of contract, or just plain insolvency. Even if you have insurance, insurance policies have limits on coverage. Insurance may actually increase your chances of being sued because it only makes it more profitable for aggressive lawyers to sue you. When they sue they almost always sue for more than the policy limits because they want the defendant to put pressure on the insurance company to settle the case. This creates all kinds of anxiety for the defendant.
There is nothing as comforting as knowing that you have structured your assets in a fashion that will protect you in case of a lawsuit. A well constructed asset protection plan will give you peace of mind at little or no additional cost.
What is an Asset Protection Plan?
An Asset Protection Plan is not some clandestine plan that is intended to hide assets from courts or creditors; it is a well thought out arrangement of your assets in a fashion that will protect you if someone brings a lawsuit. In most cases, it will stop someone from bringing a lawsuit against you, or if they do sue, they will realize that they are not getting anything above insurance policy limits. The plan has to be put in place before the liability is incurred or any alleged tort is committed. Of course, a creditor may attempt to overturn your asset protection plan, but, the longer the plan is in effect before the liability is incurred, the better your chances are that the plan will stand up.
An asset protection plan protects the individual from all unsecured creditors. A corporation or LLC can protect you from your business's creditors. An asset protection plan protects you even if the corporate veil is pierced or you have other creditors.
A sound asset protection plan is straightforward; you should be able to understand it. If it seems too good to be true, it most likely is not true. This article will emphasize the relatively simple things that can be done, while making the reader aware of the more complex methods that exist. Asset Protection Plans can range in cost from nothing to several thousand dollars ,depending on the size and complexity of your situation.
Timing is Everything
Most people think that they can transfer assets to their spouse or children if they find themselves being a defendant in a lawsuit. That just is not true! A conveyance that is made to hide assets from legitimate creditors is a fraudulent conveyance. A gift, transfer, or sale without reasonable consideration is considered to be fraudulent if it is made by someone who is insolvent, or by a person who is about to incur debts which are beyond his ability to repay. Schemes or devices to hinder, delay, or defraud creditors will be overturned by a court.
I was recently at a luncheon where one of the participants at our table told about their father who was in an assistant living facility. The senior was a stubborn old man who became upset when another stubborn out coot would not get out of his way, so he ran the old coot's foot over with his wheelchair. The old coot then sued the other resident for running his foot over. The fellow siting at our table was not concerned because after that happened they transferred all of his father's assets to him and his sisters. I did not have the heart to tell him that this sure sounded like a fraudulent conveyance to me.
Doesn't just transferring assets after the malicious act was performed seem to good to be true? Was O.J. Simpson hit in the head too may time while playing football. He seemed to think that he could transfer the rights to his book to a corporation that his children owned and keep the proceeds from the Goldman family. That did not work; the court ruled that it was a "scheme or device to hinder, delay, or defraud creditors." Please see from the below link.
O. J. 's Attempt to Transfer Assets
- Goldman family purchase rights to OJ\'s cancelled book \'If I Did It\' | Mail Online
The family of Ron Goldman has acquired the rights to O.J. Simpson's canceled book, 'If I Did It,' from a court appointed bankruptcy trustee
There was a case where a doctor who lost his malpractice insurance so he divested himself of most of his assets. About a year later he committed an act which his patient considered malpractice and he was sued about two years after the transfers. Even though the transfer took place before the malpractice, if the plaintiff could show that the doctor harbored actual fraudulent intent at the time of the transfer it would be a fraudulent conveyance.
Intent is very important. Transfers with the intent to defraud and /or right before a debtor incurs a debt can be attacked by a creditor, but, the creditor has to prove intent to an intend to defraud. If a debtor is gifting to his children every year, it would be hard to prove that he is doing with an attempt to defraud.
Some states have rules that would reverse a conveyance in which a person in business is left with an unreasonably small capital. There would be a statute of limitations relative to these transfers. For example, assume a physician transfers all of his assets to his wife and he was able to operate for 6 years without any problems, a creditor would have a problem attacking the transfer.
The longer the period is between the conveyance and the malpractice the less likely it is that the transfer will be considered fraudulent. Also, a series of small conveyances over a period of time are much more likely not be considered to be fraudulent than one large conveyance of most of your assets.
Some advisors like to recommend placing assets in foreign trusts or corporations in places that have secrecy laws and even allow secret ownership. I do not recommend that, and I highly recommend that if your advisor makes such recommendations that you consider a new advisor. A court may be inclined to consider a secret accounts or ownership to be a "badge of fraud."
While a US court may not be able to subpoena documents in certain foreign countries, the court can question you about them. If you refuse to answer the questions, you can be held in contempt of court. The court may try to incarcerated you until the questions are answered.
In order to avoid any criminal complications and/or costly legal battles, a good asset protection plan should be transparent; you should never have to hide any of the transactions that are part of the plan. This article will only deal with strategies that are transparent; you can sleep soundly using these strategies.
Rule 1- Try to Avoid Direct Inheritances
The best way to keep your wealth is to protect it before you even receive it. A smart parent never leaves any funds to their son or daughter, "the doctor." The whole fraudulent conveyance issue can be avoided if the will is crafted in a fashion that shuts off any of the beneficiaries' creditors from ever making any claims against the inheritance property or the earnings from the inheritance.
Generally, it is better to leave your estate to trusts with the income going to the beneficiaries. In the long run, the beneficiaries will receive most of the benefits of the inheritance because they are receiving the trust ncome.
It is crucial to select someone who will follow your wishes in choosing a trustee. It can be a family member.
The cost of administrating the trust can be minor. You can have a provision that if administrative expenses exceed a certain percent of the trust for a period of time, the trust should be terminated.
Below I will discuss spendthrift trusts. The trust set up under your will should take advantages of this concept.
In most states, if not all, in the event of a divorce, your spouse cannot get at these funds.
Anyone who advises their parents should ask them to leave their inheritance to them in the form of a trust.
Rule 2- Use Qualified Plans and IRA to the Maximum Protection
In this article, a qualified plan is a plan that is covered by ERISA and is qualified under IRS code section 401. These plans are set up by an employer and are required to file tax returns with the IRS (form 5500 series). 401K's and similar plans come under this heading.
The purpose of ERISA was to protect employees; therefore, self-employed plans (HR-10's, KEOGH's) with only one participant do not come under Title I of ERISA. In some states, it is not clear if they are exempt even though they come under section 401 of the IRS code. Some states like NY have made it clear that these plans are exempt.
As a matter of federal law, all qualified plan that qualify under Title I or ERISA are protected from creditors. In addition many states also make IRA's protected from creditors.
O. J. Simpson has asserted that his NFL pension was protected.
Jay D. Adkissonv and Christopher M Riser were kind enough to make a chart of state exemptions available on the Internet. This chart is as of May, 2007, and things do change. This is an execellant starting point. I hope they come on with a new edition of their book Asset Protection: Concepts & Strategies. This chart is worth the price of the book.
Exemptions By State
- State Exemption Chart on Creditor-Debtor Issues
Asset protection research specific to each state in the areas of Qualified Retirement Plans and IRAs
Rule 3- Use The Homestead Exclusion
Buying a home is a good way to keep your assets away for creditors. Each state has an amount of equity that you are allowed to keep in the event of bankruptcy. This amount varies greatly from state to state.
The link discussed above has a chart which summarizes this exemption by state; however, you may want to check a more current source. Changes are common and this chart is as of May 2007.
Changes tend to be in the debtor's favor. New York had a $10,000 exemption for several years and raised it to $50,000. Recently there has been an additional increase; it now ranges for $75,000 to $150,000 depending on the county.
Texas and Florida have unlimited exemptions, but the size of the property is limited. Florida allows 160 acres in a rural area and ½ acre in an urban area. Texas allows a family to keep 200 acres in a rural area and 1 acre in an urban area. A single person is allowed 100 in a rural area, not the 200 allowed by a family.
Moving to Florida after retirement can be a terrific asset protect strategy for a physician. One problem with medical malpractice is that the statute of limitations for a minor does not start to toll until the minor reaches 21. A retired doctor could have all of a sudden be hit with a malpractice suit over 20 years after he retires.
It was no surprise that O.J. Simpson moved to Florida after his trial!
Generally the above limits are for each person. If you own your house jointly with your spouse and you are hit with a lawsuit your equity is protected up to the limit. There are some differences between states on just how title is treated. In some states the spouse's interest cannot be divided which poses another problem for creditors. If you equity is approaching the limit, you may want to discuss just how it works in your state.
Rule 4 - Use Trusts
As was discussed above, trusts should have a spendthrift clause and are a great way to protect assets from creditors.
This clause states that it is the wishes of the person setting up the trust (grantor, settlor) does not want a creditor of the beneficiary to be able to tough the funds. This works fine for setting up trusts in which the grantor is not the beneficiary.
In most states the funds are not protected from creditors if the beneficiary is also the grantor. These are referred to as self settled spendthrift trusts. I am aware of five states that do allow this: Nevada, Utah, Arizona, Alaska, and Rhode Island. If you live in one of these states, you can easily use this method.
The issue of out of state residents using these trusts is very complex and I cannot do that topic justice in the short essay.
Medicaid has it own set of laws, and trusts can be very helpful in that area if they are set up at least 5 years before the move to the nursing home is necessary. There are several outstanding lawyers who practice in that area.
Rule 5- If Necessary Use Insurance Products
The rules for annuities and life insurance vary considerally from state to state.
The link discussed above can be very helpful. If you have a substantial portion of your assets in insurance, or intend to put a substantial amount into insurance products, you should review this area of bankruptcy law. The chart in the link is a good starting point, but you may want to review it with a good attorney that specializes in that area in your state.
The disadvantage of insurance products is cost.
Rule 6- Follow the KISS Rule
The KISS rule is "keep it simple stupid!" Qualified plans, IRA's, home ownership and even trusts are relatively simple.
There are other more complicated things like, Nevada corporations, and off shore corporations These items are very complex and there some extremely unscrupulous people are selling the plans. Make sure you have a good attorney review anything you do in that area. These are much too complex for this hub to cover and I would not want to mislead someone with an inadequate article.
Family Limited Partnerships seem to be used by many of the best estate attorney in the country. They also have some asset protection uses, however, there seems to be some debate among the legal community as to their effectiveness in protecting assets from creditors.
By properly using the homestead exemption, exempt pension instruments, trusts, and insurance products, a person can build their wealth in a fashion that makes them judgment proof.