You might be a careful driver with good insurance. You might treat people fairly and with respect, enjoy excellent relationships, and avoid conflicts and risky behavior like the plague. Why would you need to be protecting assets from lawsuits?
Unfortunately, it doesn’t matter. Someone can still sue you for everything you’ve got.
There is always a risk of being sued. Beyond the cliché of the car accident lawsuit (a real possibility that could happen to anyone), consider the following financial risks.
Personal Liability Risks:
- Divorce. It could never happen to you… until it does. Too many people intermingle inheritances and other windfalls only for things not to work out… Unfortunately, this can be an expensive breakup, especially if your ex sues for something that you don’t feel they’re entitled to have. The cherry on top is that retirement funds are not protected from divorcing spouses, unlike other creditors.
- Social Host Liability. If you serve friends alcohol at your home and one of them gets in an accident on the way home, someone can sue you.
- Vicarious Liability and Employee Actions. You can be personally sued if your minor child, business partner, or employee are in an accident or cause injury or damage.
- Medical Bills. Medical issues are a top cause of bankruptcy. Even when people have good health insurance, a severe injury or illness can wipe them out. And if the person is unable to work for some time, they can exhaust disability income and even lose their employee-sponsored health insurance.
- Debt. If you lose your source of income and default on your debts, your creditors can come after any unprotected assets, sometimes forcing consumers to seek bankruptcies.
- Foreclosure. If you cannot make your mortgage payments, the bank can seize your property through foreclosure. Federal law limits liability for debt secured by your personal residence. However, no such restrictions apply to commercial loans. A commercial foreclosure could put other assets at risk unless you have contained the risk in advance.
Professional Liability Risks:
- Trademark Infringement Lawsuits. This is all too common, and trademark searches don’t always ferret out the sticky situations beforehand. If someone thinks your business or product name is too close to theirs (even if you were unaware of its existence), or your jingle, mascot, or customer process looks too similar, they may sue for damages.
- Work-related Vehicle Accidents. If you have company cars, trucks, or even use drivers for deliveries in their own vehicles, people will come after you or your insurance company for damages and injuries caused by employees.
- Workplace or Business-Related Injuries. You likely have worker’s compensation insurance to cover for medical bills and lost wages if an employee hurts themselves on the job. (If not, you must!) But are you prepared if a customer slips and falls on a wet floor and sues you and your business for an injured back that puts them out of work? And if a customer becomes injured or ill while using your product or after dining at your establishment, you may also be held responsible.
- Breach of Contract Claims. Even well-intentioned business owners sometimes fail to fulfill on promises. If you are doing business under the terms of a contract and fail to live up to those terms, it could make you liable for damages.
- Employment Discrimination. Justified or unjustified, a well-meaning hiring manager could expose you to a discrimination suit just by asking the wrong question in an interview, or firing an employee in the wrong way.
- Sexual Harassment Accusations. Just because you believe the lawsuit is without merit doesn’t mean the plaintiff won’t go forward with the case.
- Then there’s Malpractice Suits, Errors and Omissions Claims, and the list goes on.
Strategies for Protecting Assets from Lawsuits
When it comes to lawsuits, unfortunately, it ultimately doesn’t matter if you feel like you’re to blame or not—they can happen regardless and be a huge drain on your finances. If you’ve got significant or visible assets, you are even more of a target, as unprotected assets make a lawsuit worthwhile (even if it’s settled out of court). And unfortunately, the more wealth you have, the bigger a target you are.
Avoiding displays of conspicuous consumption is a sensible place to start. However, there is much more you can (and must!) do to protect yourself from lawsuits and judgments.
1. Insure Yourself and your Business Carefully and Adequately.
Insurance is an excellent place to start because in many cases it exists precisely to protect you from lawsuits and liability because of accidents and all kinds of unexpected occurrences. In addition to adequate personal insurances such as car, home, health, and life, you’ll want an umbrella policy, as discussed in our last post on insurance. Umbrella policy coverage can raise your personal liability protection as much as $5 million beyond your homeowner’s and auto insurance limits, very affordably. If you own a business, you must also have adequate business insurances, such as:
- Errors and Omissions (if applicable)
- Commercial Liability
- Worker’s Compensation (mandatory in most states)
Additionally, if you own or lease a building or vehicle for business, you must also have insurance policies on them before you open for business.
2. Separate your Business Assets from Personal Assets with Business Entities
If you own a business or participate in entrepreneurial pursuits of any kind, it’s important to separate your personal assets from those of your business. Without a separate business entity, such as a corporation, limited liability company (LLC), or limited partnership, you could be at risk of bankrupting yourself over even unfounded claims. There are several entities to consider:
Sole proprietorships offer no limit on personal liability. Depending on the state you live in, even your home could be at risk.
General partnerships can actually increase your liability for your partner’s actions. Avoid them.
If you invest as a limited partner in a partnership, you can’t be liable for more than what you invest in the business. The downside is this: you can’t take an active role in running the business, or you become a general partner, and your assets are fair game. Family Limited Partnerships can be effective in some situations.
S corporations and C corporations provide excellent asset protection for their owners. They are taxed differently, but provide similar asset protection benefits. Unless you commit fraud (which can invalidate a corporation’s protection), this protects your personal assets, even if your business loses a lawsuit.
Limited Liability Companies
LLC’s also provide asset protection against business lawsuits for their owners, with fewer restrictions on ownership than S corporations. They also allow their owners to choose whether to file federal taxes as a corporation or as a partnership.
This is a multi-entity strategy. They protect your most valuable business assets, including equipment, machinery, or intellectual property. This allows you to separate business activities from business assets, significantly reducing liability. The holding company can own the business’s assets, and lease them to the operating company.
To Be Continued…
Next week, we’ll continue with the discussion about protecting your assets from lawsuits and judgments by covering
- Saving Money Safely
- Protecting your Home from Lawsuits and Creditors
- Protecting Your Investments and other Assets
- What NOT to do when someone threatens a Judgment
- and more.
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