Yet another Umbrella Policy Topic

[chinaco]

I have an umbrella and am considering increasing it. My question is related to that assets that are at risk if I were sued for basic liability.

It should go without saying, I am excluding situations where one might be sued for damages/penalties for criminal activity where no policy can shield assets.

It seems to me that I read something at one time that indicated that certain retirement assets are shielded from basic liability judgements. Of course, this may vary from state to state.

Questions:

1) Is this true? Can you cite any resources?

2) If true, which assets are shielded?


I figure this information might help me to determine if I need to bump up the amount of the umbrella.

 

[MasterBlaster]

The short answer to your question is - Yes qualified retirement assets are shielded from legal assesments.

Remember OJ. Simpson - He still lives well on his NFL pension even though his other assets have been taken.

So pensions, 401ks offer the best protection. IRAs also have been given protection status, However their protection is less so than a 401k. There have been cases where IRA assets above what the courts deem to be needed for living were made available to settle lawsuit claims. However, in general IRAs have been (mostly) shielded from legal action. The rules determining IRA vulnerability to lawsuits is different depending on which state you live in.

Do a Google search on lawsuits and retirement assets and you'll have lots to read about this topic.

 

[ERD50]

Related to increasing your coverage, please check my logic on umbrella policies. I am unable to make the connection between 'how much assets I have' and 'how much coverage I should have'. Example:

Say you have $1M 'protected' assets, $1M 'other' assets. I keep hearing that the 'conventional wisdom' says you should have a $1M umbrella policy.

But, if you get sued for $2M or more, the insurance covers $1M, and they take your unprotected $1M. So it seems to me, the amount of coverage you want is dictated more by how much you think you might get sued for, rather than how much you have to protect - right? In the above case, a $2M lawsuit with a $1M umbrella; your unprotected assets are wiped out, whether they were $1.00 or $1M. So what good was the insurance?

So if you need an umbrella equal to the amount you might get sued for to protect yourself (how can you predict that?) - it seems to be unrelated to how much assets you have. In fact, it almost seems more important to have a lot of coverage if you have smaller assets. Don't you risk an increased chance of losing it all in a suit? In the above example, if I had $3M unprotected assets, and got sued for the $2M, I'd still have $2M left (ins covered $1M I paid $1M), but if I have $500K in unprotected assets - I lose it all.

And for those who say that having a high net worth invites lawsuits, doesn't having the umbrella ins do the same? I have umbrella ins, but I really wonder about the value of it. I suppose you are much more likely to become responsible for a $50,000 medical bill that is not covered w/o umbrella - maybe the umbrella ins is really geared more towards those events. I suppose multi-million dollar lawsuits against responsible individuals are almost as rare as lottery jackpots.

-ERD50 (I hate insurance - it makes my head spin)

 

[chinaco]

Your logic makes alot of sense ERD50. I am not sure of my actual financial risk exposure to a lawsuite. You are correct (what you implied) insurance is used to protect one against a financial loss.


But your logic is sound. If, for example, someone was the cause of an ato accident that resulted in someone being disabled or death, they would be sued for $$MM.

Where it gets a bit murky is when one considers what might typically happen versus a complete catastrophy.

Based on your logic, a 2X (vulnerable assets) Umbrella Policy makes sense. Especially when you consider what you have to lose and the cost of 2X.

 

[FinanceDude]

Some states have enacted limits on how much can be awarded to someone seeking damages.

However, here's how I look at it. If I have $1M in assets, I want to have $2M in umbrella. If you're negligent, the person suing you will have an attorney is looking for the largest assets. I would rather have them sue the INSURANCE COMPANY than go for my assets.

Keep in mind that the WEALTHIEST people in America are the biggest consumers of insurance.............

 

[d]

... and look beyond any potential judgement; if you're sued, the insurance company, not you, will be paying for the defense.

 

[ERD50]

I would rather have them sue the INSURANCE COMPANY than go for my assets.

Does it work that way though? They are going to sue me, not the insurance company. If I had a legitimate claim against someone, I would want what was due me, regardless of the amount of insurance they had (though you can't get blood from a stone). So, if I really felt I deserved $3M, I wouldn't stop at $2M, just 'cause that's how much insurance you have.

But, it does make sense that the bigger the policy, the more effort the insurance co is going to put into the defense. They are protecting their assets. And that could help protect your own,

-ERD50

 

[brewer12345]

Does it work that way though? They are going to sue me, not the insurance company. If I had a legitimate claim against someone, I would want what was due me, regardless of the amount of insurance they had (though you can't get blood from a stone). So, if I really felt I deserved $3M, I wouldn't stop at $2M, just 'cause that's how much insurance you have.

If an insurer has $2MM of fat potentially in the fire, they will be hiring far nastier lawyers than you could ever hope to find, and they will work their slimy tentacles to their advantage in shucking off the suit/settling the thing for less than their obligation.

 

[bbbamI]

If you are sued, can they (the lawyers) find out how much you have in assets and insurance under an Umbrella policy?

 

[Martha]

I have an umbrella and am considering increasing it. My question is related to that assets that are at risk if I were sued for basic liability.

It should go without saying, I am excluding situations where one might be sued for damages/penalties for criminal activity where no policy can shield assets.

It seems to me that I read something at one time that indicated that certain retirement assets are shielded from basic liability judgements. Of course, this may vary from state to state.

Questions:

1) Is this true? Can you cite any resources?

2) If true, which assets are shielded?


I figure this information might help me to determine if I need to bump up the amount of the umbrella.

What is exempt from claims of creditors is a mix of federal and state law and may depend on whether you file bankruptcy or not. If you want to say what state you are interested in, I can get you a link of your state's exemptions.

ERISA qualified retirement plans and pensions are not subject to creditor claims, except for claims of the federal government (for example, taxes) and except for claims of a spouse in a divorce action. This is true whether or not you file for bankruptcy and no matter what state you live in.

IRAs, including both Roth IRAs and traditional IRAs are exempt up to $1,000,000, plus any rollover amounts from ERISA plans like 401ks. However, the IRA exemption only applies if you file for bankruptcy. Here is a link to the exemptions under the bankruptcy code: http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000522----000-.html

If you don't file bankruptcy, then what is exempt in your IRA depends on state law, which is all over the board, from fully exempt to not exempt at all.

Other than the ERISA exemption for qualified plans and pensions, the only way to know what is exempt is to consult the law of your state. For example, Minnesota has a $250,000 homestead exemption. Florida has an unlimited exemption. Wisconsin has a $40,000 exemption. There are even a couple of states that have no homestead exemption.

My personal feeling is that an umbrella policy of a million or two million is reasonable unless you have particular circumstances that makes your risk greater,such as owning rental property.

 

[d]

no matter the amount you might be sued for, your umbrella policy will have to foot the bill up to the stated amount ... the greater that amount, the more
"enthusiastic" will be the defense they mount on your behalf.

 

[MooreBonds]

no matter the amount you might be sued for, your umbrella policy will have to foot the bill up to the stated amount ... the greater that amount, the more
"enthusiastic" will be the defense they mount on your behalf.

Although every situation is different, a project manager working for another contractor on a previous contract related a story about one of his previous construction projects where they were sued:

A large opening was cut into a roof, in order to lower down a large Air Handling Unit (basically, an industrial-sized Air Conditioner/Heating unit). The hole was covered up with plywood, and had signs/ropes around it. A carpenter working for the general contractor was removing the boards covering up the hole, when he fell down into the hole. He had serious injuries, eventually making some form of a recovery (unclear how much of it was genuine pain & suffering vs some theatrics). He didn't sue his employer (who originally cut the hole in the floor). He didn't sue the company that owned the building.

He sued the contractor that was installing the Air Handling Unit. They had insurance, and the insurance company's lawyers defended their case. It went before a jury, and they awarded the carpenter $7 MM. The insurance company opted to pay it, even though they had the facts on their side. Their reasoning: it would have cost so much in legal fees and time, that they decided to simply go ahead and pay it.

Now, the contractor has much higher insurance costs due to their claim history. So, even though you can have large umbrellas, and have the insurance company's lawyers on your side, the insurance company might still opt out for paying a claim you may not think is necessarily legit or should be fought, given the $ at stake.

 

[Bikerdude]

If you want to say what state you are interested in, I can get you a link of your state's exemptions.

Martha,

Can you give me a link for Connecticut? If you're sued when do you file for bankruptcy to protect your assets?

 

[MooreBonds]

What is exempt from claims of creditors is a mix of federal and state law and may depend on whether you file bankruptcy or not. If you want to say what state you are interested in, I can get you a link of your state's exemptions.

Mrs. Moderator, do you happen to have the links handy for Missouri and Florida?

 

[Martha]

Martha,

Can you give me a link for Connecticut? If you're sued when do you file for bankruptcy to protect your assets?

http://research.lawyers.com/Connecticut/Bankruptcy-in-Connecticut.html

I see Connecticut only has a 75,000 homestead exemption; not too great.

Generally, my favorite site for getting "the law" is www.findlaw.com, but I linked to the lawyers.com site for this one because it had a simple explanation of the exemptions. Findlaw will give you the exact statute.

Generally I would not recommend filing bankruptcy until you absolutely need to. Most law suit are settled well within insurance limits. Even if you end up with a judgment greater than the insurance limits, the claim may still be settled post judgment for the amount of the insurance.

Back in the days when I was in the bankruptcy business, which is now a number of years ago, I often didn't have people file bankrutpcy until they got a levy or garnishment. YMMV.

 

[Martha]

Mrs. Moderator, do you happen to have the links handy for Missouri and Florida?

I'll make you work because my internet connection has bogged down bad. Go to this part of findlaw.com: http://www.findlaw.com/casecode/#statelaw

Click on the state you are interested in. When you get to the state, click on the link for statutes. Then search by key word, such as "exempt" "creditor" "homestead" .

 

[Bikerdude]

http://research.lawyers.com/Connecticut/Bankruptcy-in-Connecticut.html

I see Connecticut only has a 75,000 homestead exemption; not too great.

Generally, my favorite site for getting "the law" is www.findlaw.com, but I linked to the lawyers.com site for this one because it had a simple explanation of the exemptions. Findlaw will give you the exact statute.

Generally I would not recommend filing bankruptcy until you absolutely need to. Most law suit are settled well within insurance limits. Even if you end up with a judgment greater than the insurance limits, the claim may still be settled post judgment for the amount of the insurance.

Back in the days when I was in the bankruptcy business, which is now a number of years ago, I often didn't have people file bankrutpcy until they got a levy or garnishment. YMMV.

Thanks Martha. I guess I'm more worried about the IRA but that's what insurance is for.

 

[JustCurious]

He sued the contractor that was installing the Air Handling Unit. They had insurance, and the insurance company's lawyers defended their case. It went before a jury, and they awarded the carpenter $7 MM. The insurance company opted to pay it, even though they had the facts on their side.

Apparently a jury disagreed that "the facts were on their side" after all the evidence was presented at trial. And as far as the insurance company "opting" to pay, they didn't have much of a choice in the matter once a judgment was entered.

 

[CybrMike]

There are also other things you can do to protect your assets if someone does win a suit against you. Talk to a good attorney about how to shield your assets and you will get the info. Having your assets in an LLC is one strategy.

 

[Martha]

Thanks Martha. I guess I'm more worried about the IRA but that's what insurance is for.

Well, at least under the current bankruptcy code you would have a million dollar exemption for the IRA.

 

[JustCurious]

There are also other things you can do to protect your assets if someone does win a suit against you. Talk to a good attorney about how to shield your assets and you will get the info. Having your assets in an LLC is one strategy.

Cybrmike, I don't know where you got your information, but putting your assets in an LLC is a terrible strategy. It would have no effect on anything.

 

[Martha]

Having your assets in an LLC is one strategy.

Maybe for some appropriate assets would help but never bullet proof.

Here is an old thread where I talked quit a bit about protecting assets from creditors. I think the thread is pretty good and so I won't repeat myself.

http://early-retirement.org/forums/index.php?topic=2016.0


Since that thread, the law has changed regarding IRAs. At that time the law was in flux and it now has settled down to provide what I described above. If you file bankruptcy, up to a million dollars in an IRA is exempt. If you don't file bankrutpcy what is exempt depends on the law of your state.

 

[chinaco]

Good feedback... Thanks.


I am beginning to believe that a $2MM umbrella in retirement makes sense. Escpecially for the cost per year... $2mm (todays $) should cover most situations except for catastropic mega-awards.

Liabilty Insurance is an instrument that is designed to guard against financial loss.


I thought that I heard somewhere that juries/judges were more likely to award mega judgements against companies and insurance companies rather than middle class individuals (in cases that did involve criminal activity).

Has anybody read any material that confirms this to exist?

 

[CybrMike]

Cybrmike, I don't know where you got your information, but putting your assets in an LLC is a terrible strategy. It would have no effect on anything.

Thanks, but I'll trust my attorney who tells me that if there is any judgement against me, the person will only be able to have access to the "income" of the LLC. If you never make a distribution from the LLC, the person who has the judgement will have to pay the taxes from the "income", while never receiving the income. This usually forces settlements of pennies on the dollar.

 

[Martha]

Thanks, but I'll trust my attorney who tells me that if there is any judgement against me, the person will only be able to have access to the "income" of the LLC. If you never make a distribution from the LLC, the person who has the judgement will have to pay the taxes from the "income", while never receiving the income. This usually forces settlements of pennies on the dollar.

I would check with your lawyer to make sure you understand this right. In the states where I have practiced this would not be the case.

What I would do if I represented a creditor or was a bankrupctcy trustee, I would step into your shoes as an owner of an interest in the LLC and sell your interest. If you owned the entire LLC I would have the option of selling off its assets. You would have no control over the LLC, the trustee would have control. Your interest in the LLC would not be exempt from creditors unless the value was really small. In some states, depending on the structure of the LLC, there may be barriers to selling your interest, but the trend in bankruptcy law is to find a way to liquidate the asset.

If you look at the discussion I linked to above, some people have used partnerships to try to do the same thing, with mixed success. If you have an asset with substantial value, one way or another a bankruptcy trustee is going to be able to realize on that value.

You might read the thread I linked to above which discussed issues you raised in your post. Also, take a look at this post:

http://early-retirement.org/forums/index.php?topic=2016.msg31545#msg31545

As far as not making a distribution from the LLC so the creditor is forced to pay tax on phantom income, all owners of the LLC would be treated the same so all owners would have phantom income. If you had controlling interest in the LLC, the trustee would find a way to force liquidation or distribution.