Asset Protection - Possible?

[Culture]

OK all you high net-worth people out there - Is there any real way to protect your assets from lawsuits? I am not worried about protection from bankruptcy, just liability-type lawsuits.

Here is the situation. My wife and I have significant assets in non-sheltered accounts (outside of 401(k) and IRA). This represents about 2/3rds of our assets. Out attorney has indicated that IHHO, there is no reasonable way for someone at our asset level to protect assets, and advised purchasing a good umbrella insurance policy (we have done this) and/or buy an expensive house (which is sheltered in Texas, we passed on this option). He recommended that we come back to talk to him about Family Limited Partnerships and Offshore accounts when we are worth "10-20 million." He felt that these solutions were not workable (cost effective) at levels below this.

I will add that this attorney is one of the most high regarded attorneys in this area of law in Houston and he was recommended by several attorney friends of mine. I guess that does not guarantee that he knows what he is talking about, but is a step in the right direction. I always tend to believe anyone who tells me I am wasting my money to give them more money.

My own research has been a bust. This is obviously an area in which a lot of quacks operate, and there is lots of contradictory advise. Does anyone have any advise about this issue? What does everyone else do? I have heard that annuities are sheltered from lawsuits. Is this true? Any help is appreciated.

 

[REWahoo]

Although I'm not sure I qualify as a "high net worth" person, my approach is an umbrella policy and being very careful. I think you got good advice.

 

[Nords]

OK all you high net-worth people out there - Is there any real way to protect your assets from lawsuits? I am not worried about protection from bankruptcy, just liability-type lawsuits.
He recommended that we come back to talk to him about Family Limited Partnerships and Offshore accounts when we are worth "10-20 million." He felt that these solutions were not workable (cost effective) at levels below this.
My own research has been a bust.

No, I think you've done everything worth doing. I don't think we'll ever exceed USAA's $5M umbrella liability insurance.

Get as much umbrella policy coverage for your gross worth (not your net worth, the court doesn't care about your mortgage debt!) as you can find and, when you get to $10M, have your CPA and your legal team come brief you on your private island...

 

[Culture]

Although I'm not sure I qualify as a "high net worth" person, my approach is an umbrella policy and being very careful. I think you got good advice.

Let's define high net worth for the purposes of this thread as "worth suing." I suspect that requires a net worth over about $250,000 outside of assets protected by statute (say house, 401(k) and IRA). Does this seem reasonable?

 

[Culture]

... and, when you get to $10M, have your CPA and your legal team come brief you on your private island...

I don't think I need to worry about this phase of the process. ER will come long before $10M.

 

[REWahoo]

Let's define high net worth for the purposes of this thread as "worth suing." I suspect that requires a net worth over about $250,000 outside of assets protected by statute (say house, 401(k) and IRA). Does this seem reasonable?

Seems reasonable to me.

 

[FinanceGeek]

First thing I'd say is, learn your state's asset protection legal provisions. Best resource I know of is Texas Asset Protection State Resources

From the looks of things, TX has a decent homestead provision. From a quick read of the webpage I referenced, it appears that annuities are exempt as long as you don't buy them in violation of the fraudulent transfer statutes. OK, I've got my asbestos underwear on...

 

[Culture]

From a quick read of the webpage I referenced, it appears that annuities are exempt as long as you don't buy them in violation of the fraudulent transfer statutes. OK, I've got my asbestos underwear on...

According to my insurance company, my profession of structural engineering is the second most risky for litigation, second only to geotechnical engineering. Interestingly, you hear constantly about the problems doctors face for litigation, by no one is concerned about the structural engineer. I am willing to consider a cost of 0.5% to 1% of assets for protection.

 

[FinanceGeek]

I am willing to consider a cost of 0.5% to 1% of assets for protection.

If you buy your VA from VG or Fido you can keep the explicit costs to around 25 bps, and the implicit costs (e.g. the delta in expense ratio between best of breed index fund / ETF and the VA subaccount offering) to around the same. So - a net cost of 50 bps is attainable.

Honestly, a domestic FLP would almost certainly be cheaper to administer even for a modest portfolio, but from what I've read they don't really offer much asset protection unless you get pretty fancy with entity creation to own the GP interest.

 

[ERD50]

Get as much umbrella policy coverage for your gross worth ...

I went the umbrella insurance route also, but I have never understood this oft-repeated recommendation to 'cover your net worth'. It makes no sense to me.

Ahhh, I thought I brought this up before:

http://www.early-retirement.org/for...post482351.html?highlight=umbrella#post482351

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.

-ERD50

 

[FinanceGeek]

Forgot to add - most umbrella policies sold by homeowners insurance agents explicitly do not cover any professional liability...what you probably want is malpractice insurance, E & O insurance, or somesuch? Maybe you have access to a professional organization that you can join and acquire insurance that way.

To answer ERD50, that advice is based on the (dubious) assumption that a plaintiff's attorney would not bother to sue for more than what can reasonably be collected from a defendant. If someone's only got $1m and will file BK to discharge any liability above and beyond that, what is the incremental value of winning a judgment for more?

Personally I have a differing view of umbrella insurance generally - I have found that it makes you a target for nuisance lawsuits. People who I've known in truly high risk situations seem to have no assets to their name, and little to no insurance. Perhaps the recent revision to BK law change this dynamic, but historically that's what I've seen.

 

[ERD50]

To answer ERD50, that advice is based on the (dubious) assumption that a plaintiff's attorney would not bother to sue for more than what can reasonably be collected from a defendant. If someone's only got $1m and will file BK to discharge any liability above and beyond that, what is the incremental value of winning a judgment for more?

Does that mean that lawyers have no way to determine if or how much umbrella plus net worth I have? I do not know if they can or can't, I suspect there are ways to find out? Can they discover my net worth? Isn't that private info - or do the courts allow access to that info?

If they CAN discover my NW + umbrella, seems like I'm screwed. They are going to go for it all, not stop at the umbrella, right?

I do understand that having the larger umbrella helps to 'motivate' the insurance company to defend the suit, but it still seems like it is the umbrella amount that motivates them, not the ratio of umbrella to your personal NW (or gross worth as Nords points out). They are there to protect THEIR million, not yours?

Personally I have a differing view of umbrella insurance generally - I have found that it makes you a target for nuisance lawsuits.

Does that mean they CAN find out? OK, I'm confused (as often happens when I think about insurance).

-ERD50

 

[FinanceGeek]

My guess (Martha?) is that an aggressive plaintiff's attorney (sorry for any redundancy) will be able to find out about umbrella coverage. Most likely I'm thinking they would find out through unofficial channels...e.g. a law school bud who works at the target's insurer.

That aside, the idea that any debt above and beyond asset value would be discharged in BK was the original reason to insure for 'the value of what you own'. I agree with you that this may not be sufficient...but realistically it is probably impossible for the average Joe Blow consumer to buy a larger policy than a couple of million (perhaps $5m) so what you gonna do? I think Berkshire used to sell an "umbrella doubler" policy so maybe you can get to $10m. But is THAT even enough?

 

[ERD50]

Thanks F-G.

I think it sort of comes down to just round figures, rather than any specific justifications.

With an insurance amount about equal to your NW, at least you can feel like the insurance company has as much at stake as you do. And if you did try to get 10x your NW of insurance, the insurer is probably going to be wondering what you are doing in your spare time, and wondering if YOU have enough of your own 'skin in the game'.

So, after tossing this around, something tells me there ain't much more to it than that.

-ERD50

 

[Martha]

http://www.early-retirement.org/forums/f27/incorporate-protect-assets-15861.html
http://www.early-retirement.org/forums/f28/asset-protection-trusts-27059.html#post505490

These two threads have some good information (if I may say so since it came mostly from me ) about using family limited partnerships, trusts and offshore trusts to protect assets from creditors. Most of the time you are better off getting more liability /umbrella insurance than spending money on fancy creditor avoidance tools that may very well not work out.

That said, one thing to talk to your lawyer about is whether it would make sense to establish an asset protection trust in a state that allows such trusts and whether that might give you some protection in your state.

I think that the amount of the umbrella policy should be based on risk, not the amount of assets you have to protect. I have recommended before that people get a good idea of the size of jury verdicts in their area. For example, you may be surprised at how low car accident verdicts tend to be. If you have a business, the potential of a large verdict will be higher than for individuals. For most people a couple of million should be adequate and five million is higher than what most people have. But talk to your agent about range of claims. In some parts of the country juries are generous in others they tend to be stingy. For example, Mississippi juries are known for their generosity.

 

[chinaco]

To answer ERD50, that advice is based on the (dubious) assumption that a plaintiff's attorney would not bother to sue for more than what can reasonably be collected from a defendant. If someone's only got $1m and will file BK to discharge any liability above and beyond that, what is the incremental value of winning a judgment for more?

That is probably true... but you forgot something. An insurance company will often have a legion of lawyers that will (typically) fight tooth and nail to not pay a penny... or at least if they have a weak position, try to negotiate a low or lower settlement.

The legal costs can break you as quickly as the potential award!

 

[donheff]

I think that the amount of the umbrella policy should be based on risk, not the amount of assets you have to protect. I have recommended before that people get a good idea of the size of jury verdicts in their area. For example, you may be surprised at how low car accident verdicts tend to be. If you have a business, the potential of a large verdict will be higher than for individuals. For most people a couple of million should be adequate and five million is higher than what most people have. But talk to your agent about range of claims. In some parts of the country juries are generous in others they tend to be stingy. For example, Mississippi juries are known for their generosity.

Good advice. And a good point from ERD50 - I was considering raising my umbrella when I originally read it and immediately saw the wisdom of its simplicity. In a worse case scenario it doesn't matter what your umbrella limit is. You can get sued for more - way more. It makes more sense to evaluate risk and maintain a policy big enough to seriously motivate the insurer. I can't imagine that would exceed $2M.

 

[Gearhead Jim]

AKAIK, most homeowners and umbrella policies do not cover intentionally-caused injury. My agent told me about a client who's daughter's boyfriend attacked her while in their house. When BF wouldn't stop, Dad smacked him with the fireplace poker. When BF sued, the insurance company told Dad that he was on his own.

Any experience here?
Any way to solve the problem (aside from screening kid's friends more carefully)?

 

[ziggy29]

AKAIK, most homeowners and umbrella policies do not cover intentionally-caused injury. My agent told me about a client who's daughter's boyfriend attacked her while in their house. When BF wouldn't stop, Dad smacked him with the fireplace poker. When BF sued, the insurance company told Dad that he was on his own.

This is the sort of thing that leads me to believe we need professional juries that won't be swayed by emotional 'pain and suffering' arguments. If the law allows for a reasonable use of force to stop an assault, there should be no civil liability when it happens. But that's a dream world.

In the real world the best answer is an umbrella policy, perhaps coupled with moving into assets that are protected from judgment. Texas, for example, is one of the best (or "least bad") states to be sued in because of its fairly strong protection of things like homesteads and retirement assets. So while moving into a larger house would protect more, the extra property taxes, utility bills and maintenance costs would likely be MANY times more costly than a multi-million dollar umbrella policy. Having such an umbrella is also somewhat like buying "prepaid legal" for very large judgments as the insurance company's lawyers will be on the case. They may not aggressively defend a $5,000 claim against you (it's cheaper to pay it than fight it), but most certainly would defend a $5,000,000 lawsuit.

 

[FinanceGeek]

AKAIK, most homeowners and umbrella policies do not cover intentionally-caused injury. My agent told me about a client who's daughter's boyfriend attacked her while in their house. When BF wouldn't stop, Dad smacked him with the fireplace poker. When BF sued, the insurance company told Dad that he was on his own.

Any experience here?
Any way to solve the problem (aside from screening kid's friends more carefully)?

Many ISO compliant homeowners insurance policies cover liability resulting from legitimate uses of force in self defense. Apparently either this one did not, or the use of force was judged not justified?

 

[Gearhead Jim]

Many ISO compliant homeowners insurance policies cover liability resulting from legitimate uses of force in self defense. Apparently either this one did not, or the use of force was judged not justified?

For us ignorant folk, what is an ISO compliant policy? Thanks!

 

[FinanceGeek]

ISO=Insurance Services Office

Its an organization that produces template policies with boilerplate language that many of the underwriters use.

The real fix to the situation of legal liability resulting from lawful self defense are the various liability immunity statutes that some states have. These statutes are often known as "castle doctrine" or "make my day law" statutes.

 

[Gearhead Jim]

Thnx