Here’s a stunning statistic for you: A new lawsuit is filed every two seconds in the U.S. That can present a huge, unforeseen risk to many people, especially those who have the most to lose: the wealthy. However, if you’re in the middle class, don’t think you’re immune.
Consider this cautionary tale. Sara and Jonah Williams worked for 30 years to build their fledgling business into a thriving franchise with stores throughout the nation. They thought they were protected by their thorough estate planning … until the unthinkable happened. Out of the blue they were sued by a plaintiff seeking to recover millions of dollars.
The Williamses contacted their estate planning attorney to find out if their estate plan protected their personal assets from this lawsuit. Unfortunately, their trust attorney had only used the garden variety revocable living trust, which provides no “firewall” protection from lawsuits. In the end, they were forced to settle for a king’s ransom, as they could not risk having a jury rule against them. The Williamses just didn’t know what they didn’t know.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If their trust attorney had created an estate plan with firewall protection, which involves both conventional estate planning structures to maximize the amount one may pass along at death, as well as effective “blockers” to protect their trust’s assets, their assets would have been sufficiently protected. This would have encouraged a minimal and early settlement by the plaintiffs.
Why You May Be at Risk
Affluent families and successful business owners are routinely targets for lawsuits, often devoid of legal merit, because the plaintiffs and their lawyers know that the defendant, at the end of the day, will settle rather than remain embroiled in lengthy litigation. Without proper asset protection planning in place well before any legal claim, all could be lost.
Don’t let this happen to you. Too many business owners and affluent families wait until they are sued or in trouble to inquire about protecting their assets. This problem of meta-ignorance — a person’s ignorance of ignorance — is known as the Dunning Kruger-Effect, named after the social psychologists who described it, Justin Kruger and David Dunning.
Asset protection is all about protecting your family and your legacy before the fact, not after the legal claim arises.
What You Can Do About It
Even those with estates of more moderate size can benefit from this form of planning. Removing the prospect of collectability from a legal judgment forces most plaintiffs to settle early and inexpensively, enabling clients to hold on to what they have worked so hard for over the years.
Working with a professional who can provide a comprehensive estate and asset protection plan can reduce death taxes and establish firewall protection to dissuade catastrophic lawsuits. Components of this plan could include:
- Maximizing contributions to the 401(k) or qualified retirement plans, which enjoy state-sanctioned exemption laws.
- Using a third-party dynasty trust established in one of the states whose laws expressly permit the unique protections against lawsuits, as Nevada, or Alaska, into which assets are held for the benefit of the kids and grandkids, but which provides the flexibility of the donors to reclaim the assets if they later need or want them through the exercise of powers granted to the independent trustee.
- Establishing limited partnerships or limited liability companies to own rental real estate and other operating businesses to gain charging order protection in case of a personal lawsuit.
- Establishing a foreign asset protection trust at a time when there are no known, expected or foreseeable lawsuits, in one of the recognized countries that offer added protections for trusts established in country.
This comprehensive strategy offers more robust estate planning structures and discourages frivolous lawsuits and other opportunistic litigants.
You now know what you should know!
-
You Don’t Want to Retire in Portugal: Here Are Three Tax Reasons WhyRetirement Taxes With the NHR benefit retiring and pension taxes increasing, you might rethink your retirement plans in Portugal.
-
Home Depot's Winning Ways Fueled Its 100,000% ReturnHome Depot's wide moat leaves little room for competition – and shareholders have profited as a result.
-
Financial Pitfalls to Avoid in Your 30s, 40s and 50sAs you pass through each decade of working life and build wealth for retirement, watch out for the financial traps that can hinder your progress.
-
Five Key Retirement Challenges (and How to Face Them Head On)Life will inevitably throw challenges at you as you get older. But making a flexible retirement plan — and monitoring it regularly — can help you overcome them.
-
Four Action Items for Federal Employees With $2M+ SavedIf you can't stand the chaos, maybe you can walk off into the sunset of retirement. Here are some thoughts on how to figure out if that would work for you.
-
How to Help Accelerate Support for Women's EqualityIt's International Women's Day, and the theme this year is Accelerate Action. Here's how we can all pitch in to help drive gender parity.
-
How Tariffs Could Impact Affluent RetireesThe wealthier you are, the less price increases on groceries and cars will hurt you, but if markets dive or we enter a recession, that's a different story.
-
How to Help Shield Your Retirement From InflationPicking the right investments at the right time can help ensure inflation won't flatten your retirement savings. Here are some tips.
-
Six Steps to Simplify Your Estate for Your HeirsA simplified estate strategy will expedite the settlement of your estate after you're gone, lower audit risk, reduce costs and cut your beneficiaries' stress.
-
Three Actions to Protect Wealth Transfer Amid Tax UncertaintyHow should families plan to pass on their wealth amid ongoing uncertainty over estate taxes? Even if TCJA provisions are extended, they might still be temporary.
