Jason Cain of Credit Suisse Private Bank, who helps clients insulate their asses from future potential creditors, at his office in Chicago, Oct. 31, 2012. Professionals like doctors and lawyers and anyone else who might be sued should work with an adviser to keep creditors from cleaning you out if you lose in court.
Peter Wynn Thompson, New York Times
Take care to safeguard assets against the hazards of a lawsuit
- Article by: PAUL SULLIVAN
- New York Times
- November 10, 2012 - 5:12 PM
Lance Armstrong has apparently managed to put legal structures in place over the years that will help insulate his fortune. But what about other people who may be less prominent but concerned about lawsuits? Can they also protect themselves?
The short answer is that someone's money can never be completely protected from creditors, but there are steps that can be taken to discourage people from pursuing you.
"There is no such thing as asset protection," said Jason Cain, head of the family wealth planning group in the central region for Credit Suisse Private Banking USA. "What there is is good business and estate planning that, as a byproduct, insulates your assets from future, potential creditors."
Or as Amy Jetel, a partner in the law firm of Beckett, Thackett & Jetel in Austin, Texas, said, such protection is like setting up a series of hurdles. "They can be knocked over, but every time you knock one over, it costs the creditor $500,000," she said. "So they might say, 'I'm going to settle.' They want the easy stuff."
While this may sound like the realm of just the truly wealthy, asset protection is something that people with a nice home and a couple of cars should consider, particularly if they can imagine being sued. Certain professionals who are well off but far from rich, like lawyers, architects and doctors, are at a higher risk of being sued. And naturally, children who inherit money from parents or grandparents can become targets for lawsuits and higher divorce payouts, advisers said.
So how should people think about what they might need?
R. Hugh Magill, chief fiduciary officer at Northern Trust, said that putting a proper plan in place takes time but needs to start with an assessment of what people have and how likely it is that someone might sue them for it.
"So much of the literature about asset protection starts with the assumption that you need an asset protection trust," Magill said. "I don't want to start with the solution. I want to start with the risk."
Insurance is the first level of protection. After the necessary home and auto policies, the most crucial thing is to have an umbrella policy that limits liability. Think of it as protection against the unexpected, like someone falling down your stairs or being hit by the car driven by your child.
"We view lawsuits as probably the most dangerous thing that our clients face," Jeremiah Hourihan, executive vice president at Chartis Private Client Group, said. "The No. 1 risk is a car accident where you or a family member causes harm to someone else.''
He said the company's most common liability policy was for $10 million. Another easy step is to see what is automatically protected by the states where you live. Florida and Texas, for example, have homestead laws that allow primary residences to be excluded from lawsuits. Illinois and Pennsylvania have laws that protect the equity in a home when it is owned jointly if one spouse is sued.
Retirement assets, like 401(k) plans, and some types of insurance also have some protection from creditors.
Money put in trusts for heirs is another way to shield assets. If they are worded to give plenty of discretion to a trustee in making distributions, trusts can also serve double duty and protect children from lawsuits or divorce settlements, Magill said, and be more discreet and effective than prenuptial agreements.
People who work in certain professions, like lawyers, architects and engineers, also face liability by the nature of their work. They could be named as a party in a lawsuit, even if they did nothing wrong.
"Let's say the architect designs the building and the engineers do the drawings and there was a problem with the load-bearing structure," Magill said. "So it's whoever gets sued, they're going to name the architect."
In this, doctors are a category of professionals uniquely at risk. Cain said he makes a point of telling physicians that they need to have their strategy in place long before a lawsuit surfaces.
"You want to plan now to encourage your future unknown creditors to negotiate a settlement for pennies on the dollar," Cain said. "You're not trying to avoid your creditors. You're trying to get them to the table and take a fraction of what they think they're entitled to."
At the heart of this statement is the reason many asset-protection strategies fail: They are created at the moment someone is being sued or fears a lawsuit is coming. Done that way, they run the risk of being considered a fraudulent transfer and disallowed.
Jetel said the issue was not so much the timing of a trust as the facts surrounding its setup.
"Let's say I set up an asset-protection trust, and while I'm driving home I stupidly put my makeup on and I run over a promising law school graduate and his family sues me," she said. "I couldn't necessarily foresee that I was going to go and kill this guy, so that's not a fraudulent transfer."
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