“There is sufficient anecdotal evidence that civil liability lawsuits will play an increasing role in retirement planning of unscrupulous individuals who perceive their best chance to secure a comfortable retirement is to sue someone with deep pockets,” says John Stewart, branch manager and Chartered Wealth Advisor for J.J.B. Hilliard, W.L. Lyons, Inc., a full-service investment firm based in Dublin, Ohio.
Smart Business spoke with Stewart about how businesses and individuals can safeguard themselves and their businesses through prudent asset protection planning before the inevitable liability lawsuit does happen.
What are some steps businesses and individuals can take to protect their assets from a liability lawsuit?
For hundreds of years, business owners have sought to limit their exposure to unplanned litigation risks by forming business entities designed to limit liability. The formation of corporations, partnerships, and the more recent forms of entities such as Limited Liability Partnerships (LLPs) and Limited Liability Companies (LLCs), is universally understood to be prudent business planning that is both ethical and legal.
It is now considered commonplace to arrange one’s financial affairs for the purpose of limiting unnecessary risks, including risks of loss through acts of third parties and employees, as well as unnecessary loss to the government resulting from the efforts of the taxing authorities. This arrangement is called ‘asset protection planning.’
What is asset protection planning and how does it help?
Asset protection planning is associated exclusively with preventing or minimizing the interruption of a client’s business and personal affairs when there is an assertion of questionable claims and nuisance litigation.
Although businesses and individuals have very little control over someone filing a civil lawsuit against them, an asset protection plan puts up barriers for questionable lawsuit settlements that can quickly spiral out of control to unacceptable levels. Asset protection planning is not to create an impassable roadblock to a lawsuit by a claimant, but it is rather a process by which legitimate claims are paid in due course while questionable claims are negotiated to a reasonable settlement amount.
This kind of plan seems very different than what is typically thought of as asset protection planning, which is often referred to secretive offshore tax shelters.
Contrary to popular myths surrounding asset protection planning, in reality good planning is not primarily based on tax-driven client motivation. Other than contributions to ERISA (Employee Retirement Income Security Act) plans, asset protection planning is both income- and estate-tax neutral.
Clients who insist on using exotic structures, many of which involve offshore jurisdictions or convoluted constitutional arguments to do their asset protection planning, are likely to have been exposed to one of the myriad of questionable public seminars on asset and tax protection planning. Using these techniques is an open invitation to an extended retreat at ‘Club Fed,’ that is, scrutiny and prosecution by the U.S. Federal Government.
What are some of the myths surrounding asset protection that are simply untrue?
Despite its image in display ads found in the back of in-flight magazines, asset protection planning is not about tax havens, nor is it necessarily about secrecy. Americans have a strong national sense that matters pertaining to personal and business finance should be kept private and confidential. This natural sense of privacy can, at times, be confused with a desire for secrecy.
Secrecy, to some, may imply a license to defraud creditors and possibly evade tax. An ill-conceived asset protection plan that is found, after the fact, to have violated the Uniform Fraudulent Transfers Act my well subject the client to civil liability and may also result in bar association claims against the adviser for violation of applicable ethical standards.
Defrauding creditors and evading tax are not part of proper asset protection planning. In fact, good asset protection plans are the opposite of secrecy they are about disclosing the plan. This disclosure can very well convince a potential or actual questionable litigant that even a successful trial may not mean a good settlement because of the layers of built into the client’s overall business and estate plan.
JOHN STEWART is a branch manager and Chartered Wealth Advisor for J.J.B. Hilliard, W.L. Lyons, Inc./Member NYSE, SIPC, a full-service investment firm based in Dublin, Ohio. Hilliard Lyons does not provide tax or legal advice. Reach Stewart at (614) 210-6285, (800) 285-9667 or email@example.com.