The Process is the Punishment: The Hidden Benefit of Advance Asset Protection Planning
Over the past few decades much has been written about the benefits of engaging in asset protection planning to protect one’s legacy from future unknown, unforeseen lawsuits and other third-party claims. Antidotally, those of us who provide asset protection planning services know that prospective plaintiffs are keen to settle their claims more quickly, and for far less, against those who have implemented lawful and timely asset protection planning strategies.
Over 90% of lawsuits settle for one of two reasons: Doubt as to liability and doubt as to collectability. A properly structured asset protection plan creates the latter and fosters a robust environment for a quick and relatively modest settlement. But, as anyone who has been the target of a civil lawsuit knows, “the process is the punishment” regardless of the outcome for either party.
Litigation is a cruel and distasteful process. Aside from the financial cost of lawyers, experts, time away from work and family, and the fear of the unknown, there is an emotional cost which can bring most innocent people to the breaking point. Plaintiff’s lawyers know this and exert maximum pain on the defendant with the goal of getting a quick settlement to make the pain stop. Failure to prepare for this by effective asset protection planning leaves no way to “level the playing field” with the plaintiff. Asset protection planning removes the “profit from the pursuit,” thereby fostering a more robust environment for the parties to settle.
Here is an example that makes this point: Lawrence’s estate lawyer advised him to incorporate asset protection planning while engaged in the process of planning his estate. Besides the traditional family trust used to avoid probate at death and secure some level of asset privacy, the attorney recommended his client use various structures to move assets off of Lawrence’s balance sheet such that he no longer owned those assets. The residence was placed in a single member LLC (managed by Lawrence) and the LLC interest was then placed in an irrevocable trust established in Nevada, a state that allows asset protection trusts. Lawrence then rented the home from the LLC at fair market rent, becoming a “tenant” of the property vs. being the owners. Lawrence placed his nonqualified retirement investment portfolio in an asset protection trust and has his life insurance policy held in an irrevocable life insurance trust. Lawrence’s rental properties were held in an irrevocable trust established for his children and grandchildren as part of his legacy planning, shifting the future appreciation from Lawrence’s gross estate and saving the estate taxes that would have otherwise been due at his death. All of this planning was done at a time when Lawrence had no current, foreseeable, or expectant lawsuit creditors and he remained solvent after the planning was completed.
Should Lawrence find himself threatened with a legal claim when the plaintiff learns the assets he thought belonged to Lawrence are no longer owned by him, but rather in structures not owned by Lawrence, and administrated by independent trustees, the chances of the plaintiff successfully enforcing a judgment and recovering assets from these other structures can be disappointing to the plaintiff. Under these circumstances, a plaintiff is more motivated to talk settlement or even walk away from the lawsuit then expend the time and costs associated with bringing the claim with the prospect of not being able to enforce the judgment if successful.
The result is that Lawrence will have not only protected his “treasure” but more importantly, avoided the litigation “process” and all that this encompasses as described above. This translates into Lawrence securing peace of mind knowing that he wasn’t going to be financially devasted by an unforeseen lawsuit that didn’t go his way. And even if the plaintiff wasn’t deterred by Lawrence’s planning, the likelihood Lawrence would have lost these assets to the judgement creditor are much less likely.
If your estate plan does not include “asset protection planning” you will not have the tools to defend an aggressive and ambitious lawyer from taking your assets and leaving you and your family vulnerable. If you do not have asset protection planning as part of your estate planning, you may wish to do so in order to avoid a disastrous outcome. Contact our Asset Protection Practice Group below or at (949) 333-8152 to take the first step toward preserving your financial legacy.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.