This is post was written by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends. I have spoken with Ike many times for advice on client asset protection issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix. Ike generally advises physicians and high income professionals, but these asset protection tips are relevant to all of us.
I’ve spent the last eleven years of my practice helping successful Americans at all net worth levels protect and enjoy their hard earned wealth. A good part of that involves re-educating people about their money and their risks. Below is a summary of the most common asset protection myths and mistakes top legal and financial planners want their clients to be concerned about.
I can do it later
Asset Protection it best analogized to “net worth insurance” and like insurance you have the best, most effective and legally supportable options available to you when you implement the planning before a crisis exists. Transfer of assets into plans after you have specific exposures is costly, ineffective and some cases illegal (fraudulent conveyance). The best time to act is always now and every day that passes makes your planning stronger.
I’m not rich enough to worry about asset protection
This is a sin I see committed on a weekly basis, often by professionals like lawyers, CPAs and financial advisors. These advisors often tell clients that they are not rich enough to do any planning and that that they should have a net worth north of five or even ten million dollars to consider it. Nothing could be further from the truth, especially if you are in the “Fall” of your earning career. Of course high net worth individuals must implement this kind of planning and always have, but all you have is important to you and there are precautions that can be taken at any net worth level. When should you start?
There are many simple ways to analyze this but here is an easy one, answer these questions:
- If you lost what you have today, or some significant portion of it, are you at an age, earning level and financial condition that will allow you to maintain your family’s goals and expenses?
- Do you have assets that would be difficult or impossible to replace given your age, health and economic conditions?
- Are you financially and legally prepared for a lawsuit that is either not covered by liability insurance or which often produces verdicts above the limit you are carrying?
No one can touch me because I have a “Trust”
Not a week passes when I don’t talk to someone who says, “I’ve got this covered, I think. I have my home, cars, and investments all titled in my Trust.” A little more probing on my part reveals what I expected, that the layperson I am speaking to feels that a transfer of these assets to a vehicle like an estate planning trust, commonly a Revocable Living Trust, is effective protection; it’s not. The first word in the trust is “revocable” and in most cases a judge will simply order you to revoke the trust and tender the assets for a judgment. I’m all in favor of estate planning, the huge new looming estate tax exposure is one of the issues on my client exposure checklist we address every day, but that is death planning. What has been done about your life planning and the exposures you face every day practicing your profession, driving a car, having children (some driving your car), or having employees…?
I lease all my vehicles through my business and get an awesome tax deduction in addition to asset protection
Similarly, we often see dangerous articles of personal property like your personal vehicles moved into this structure or others like an LLC or S-Corp that is your primary business, or equally dangerous, into an entity like an FLP that is holding safe and attractive assets like cash, stocks, bonds and other liquid assets. Think about it, if you lease or own your vehicle through your business, you have linked the most dangerous thing you likely do on a daily basis, drive a car, and linked it to either the source of your wealth, your business or in the case of your FLP, the place you keep your wealth.
I don’t own anything – I gave it all to my wife and kids
Transferring all of your assets to your spouse and/or children, especially after something has happened, will not protect your assets from a lawsuit. Even if it did protect you from your lawsuits, transferring your assets to your spouse and/or children opens up another Pandora’s Box. Keeping in mind that there are thousands of lawsuits filed daily due to employment grievances, “slip and fall” and auto accidents, consider this scenario:
Let’s suppose that you transfer all of your assets to your 18-year old son who causes an auto accident. Several other cars are involved in the accident and several injuries are incurred. Chances are high that the other parties will come looking for the driver with the deepest pockets. If your son “owns” your house and business, a sympathetic jury will undoubtedly take the possession away from your son in order to teach him a lesson for his reckless driving. The same holds true for spouses, parents and even friends. Also, gifting is limited to about $14K annually, per spouse, per donee. Gifts over that amount must be documented with a gift tax return. Failing to do so will result in you having to answer the question, “Are you lying now re: the date and validity of this transfer or did you cheat the IRS?” A bad place to be in a time of need.
I’m insured and have an umbrella
This is a reasonable and common question we get from clients and advisors alike. In the most egregious cases of arm-chair quarterback misinformation, we actually see uninformed advisors telling their clients that the only Asset Protection they need is a good umbrella policy – THIS IS FLAT OUT WRONG for the kind of successful people we protect. Why? Because they are successful, visible and typically have assets above and beyond just the insurance policy itself, they are good targets from a net-worth perspective.
Our position on Liability Insurance (as distinct from Life Insurance) is pretty simple: Buy as much liability insurance as you can afford, assume it won’t be adequate and have a plan B. Asset protection planning is about layers, redundancy and backstops.
What about my “umbrella” policy? – It is a great idea to have an umbrella policy, in fact, I insist on it for my clients as one of several layers. You and your liability carrier have different ideas about what umbrella means. To you it means everything, to your carrier it means specific events in the base policy, covered to specific increased limits, and governed by a specific set of exclusions detailed in the fine print of your policy. Clearly two very different definitions. The lesson here is that there is no real way to insure yourself against a universe of possible exposures and have every single one covered to an unlimited dollar amount, nor is this reasonable to expect of your liability coverage.
Some real examples of the “impossible” that actually happened and resulted in large claims:
- Parents away for the weekend return to find that a teenager died at their home during a party their child had from the drugs he brought with him results in multi-million dollar wrongful death lawsuit;
- Chiropractor adjusts a patient’s hip and the woman dies on table from cardiac arrest-he is sued for wrongful death;
- Long time, most trusted employee of medical practice molests a minor female patient during treatment;
- Employees of moving company get drunk and severely beat another employee and lock him in company truck in company yard over weekend;
- LLC for real estate development is pierced and a passive member is held jointly and severally liable for the actions of the other members;
- Dentist works on elderly patient who goes home and dies of unrelated heart attack hours later, dentist sued for wrongful death.
SOLUTION – So how do we help make sure that the coverage is enough? Pretty simple – we buy all the insurance we can reasonably afford, make sure we have the appropriate riders and umbrellas in place then we present a hard, uncollectible target beyond the limits of the policy. Most, if not all, lawsuits are motivated by the potential financial gain to the plaintiff and their attorney. In most cases, plaintiffs and their attorneys don’t chase people beyond the limits of the policy if there is nothing else to take or if there is nothing that they can get their hands on with any reasonable certainty.
This article just scratches the surface of what you need to consider when evaluating your exposures, Asset Protection planning and the countless options available. I encourage you to act today, seek experienced counsel, and remember that information in forums like this is not specific to you, is written in the broadest terms and is never a substitute for consulting with an experienced professional.
Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com.
As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation.
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