America is filled with lawyers, and lawyers sue people. Then those people hire more lawyers to ward off the suing lawyers. It's all gonzo business for lawyers and a nagging little worry for the rest of us.
Most of us will never get sued. Still, it's worth looking at ways to protect assets in case a judge someday throws the gavel at you.
Good insurance is the first step. For instance, I pay $151 per year for a $1 million all-perils liability policy on top of my auto and homeowners coverage. It's peace of mind on the cheap.
Beyond that, understanding asset protection requires us to crawl into the legal weeds with lawyers.
Joseph Cordell makes his living helping guys hang on to stuff - their bank accounts, pension plans, great chunks of their paychecks. Their kids.
"We've been protecting guys' assets from arguably the greatest menace that might exist out there," he says.
Cordell means their wives.
He's senior partner at Cordell and Cordell, a big divorce law firm based near Westport, and its clients are exclusively men.
Now he's expanding the practice to help guys protect themselves from other threats - namely lawyers waving judgments.
Ironically, your marriage license affords some round-about protection, says Cordell. Most marrieds have their money in joint accounts, and their homes are in both names. In Missouri these assets are presumed to be held as "tenants in the entirety."
Here's the upshot: Someone with a judgment against just one spouse generally can't get their hands on such jointly owned property.
This is great news for people like my wife, Susie, who married a klutz. If either of us is ever sued, it will be me.
Unfortunately, it doesn't work for accounts held jointly between non-spouses. For instance, estate attorney Janet Bandera had an elderly Missouri client who put her son on her bank account. A creditor in California hear about it and tried to seize the entire account.
Bandera fended it off by proving that the money belonged to the old woman, not the son. "But it took two emergency hearings and lots of lawyers' fees," said Bandera, who is senior vice president at National Advisers Trust and head of Moneta Trust operations in Clayton.
The spousal protection is much weaker in Illinois. There, homes can be held as tenants in the entirety, but bank accounts are generally held as "joint tenants," says Richard Coffee, a Cordell lawyer in Belleville. It's easier for judgment holders to get their mitts on it.
Most retirement accounts, such as pensions, 401(k)s and IRAs are exempt from civil judgments, says lawyer Coffee. But such plans can goof and create legal exceptions that let creditors sneak in. Retirement plans are fair game in divorce.
Risks increase if you own a little business. As a sole proprietor, a suit against the business puts your personal wealth at risk. Someone slips on a banana peel, and there goes your bank account.
That's why lawyers recommend that you incorporate. A "limited liability" or Sub S corporation provides reasonable protection. If your corporation defaults in a debt, the creditor can come after the business' assets, but not your house. Ditto with the banana peel.
There are exceptions. If you personally deliberately placed the banana peel on the floor, expect to be sued personally. Employment actions, such as a sexual harassment suit, can also put you personally at risk.
An LLC or Sub S generally won't subject you to the corporate tax rate. The profits flow through to you, and you pay at your personal tax rate.
For people at high risk of law suit, Cordell likes irrevocable trusts as protection. You create the trust, put your assets in it, and name a trustee to take charge of it. "You don't own the asset anymore. You can forget the idea of being sued for it," says Cordell.
You can receive benefits of the trust while you live, and pass it on to your heirs. The downside is that you lose full control of the assets. And it can't be revoked.
It has to be set up properly to avoid a challenge, says Cordell, and you can't wait until you're being sued. "It's better for someone who sees that there may be bad weather ahead but does not see dark clouds, much less rain coming down," said Cordell. Most small business owners should consider it, he says.