Protecting Your Assets from Lawsuit- Part II

Last week I began a series on asset protection by discussing how you can reduce your risk of lawsuit through making changes in your lifestyle and protect assets by purchasing an umbrella insurance policy. When working with our clients, we do a Liability Risk Assessment whereby we attempt to determine if there are any obvious liability risks that need to be addressed with a particular strategy. I have had people tell me that they are not concerned about liability because if they feel threatened, they’ll simply transfer assets out of their name. This won’t work because of the federal ‘fraudulent transfers rule’ that states that funds transferred in an attempt to avoid creditors is illegal and the court will order the transaction be reversed.

Professional Liability Insurance. If you own a business, you’ll want to explore professional liability coverage which may come in a variety of forms including malpractice insurance (doctors, lawyers and other professionals), errors and omissions, product liability, premises liability coverage. From time to time, you may be asked to serve on various boards of either non-profit or for-profit organizations often serving with little or no pay. This can be very dangerous to your wealth. Generally, my recommendation is to avoid such appointments. If you are considering joining a board, make certain there is significant Officers and Directors liability insurance. Remember, as a director, you are liable for the misdeeds of the people who are running the organization and rarely do you have access to much information about their activities. I have a personal friend who forfeited hundreds of thousands of dollars after the board on which he served received a massive judgment.
To Do: Get with an insurance agent who specializes in commercial insurance and have him or her do a complete insurance review with particular emphasis on liability coverage.

Beyond insurance, both federal and state law provide a variety of protections that are vital that you know about and consider taking advantage of to protect your assets from lawsuit.

Federal Exemptions. Federal law protects all assets held in certain retirement plans including company sponsored profit sharing, 401k, 403b and pension plans (Employee Retirement Income Security Act- ERISA). In addition, in a law passed in 1995 (Bankruptcy Abuse Prevention and Consumer Protection Act), Individual Retirement Accounts (IRAs) are exempt from creditors for up to $1 million if the owner files for bankruptcy protection. Assets rolled over from a qualified plan such as a company retirement plan to your personal IRA do not count towards this $1 million limitation and remain fully protected from a law suit.
To Do: Consider shielding assets by investing through retirement plans. If you want to invest primarily in alternative investments such as real estate, oil and gas, or non-public business enterprises, consider setting up a self-directed IRA. You’ll need a custodian who specializes in these types of accounts.

State Exemptions. Each state has its own set of exemptions laws that provide a varying level of protection of assets from bankruptcy. For a state-by-state summary, visit the Resource Center at; click on ‘Links’, then State-by-State Bankruptcy Exemption Laws.

Protecting Your Assets from Lawsuit – Part 1

There is a litigation crisis in America where the mantra is, “Sue everybody and we’ll sort it out later’. It is estimated that there are over 1 million lawyers in America…one for every 300 citizens. So what are the chances of you getting sued sometime during your lifetime? Turns out they’re pretty good. In fact, some research suggests that you’ll be involved in an average of five lawsuits during your lifetime. So if we can agree that there is at least a risk of you getting sued, wouldn’t it make sense to develop an asset protection strategy?

Over the next few weeks, I’ll cover a wide range of strategies that discusses lifestyle; insurance; titling of property; trusts; and estate documents.

Monitor your lifestyle. At the most basic level, your lifestyle can either minimize or elevate your risks of a lawsuit. Some of the obvious things would include not drinking and driving; observing the speed limits; securing a fence around your pool; etc. For example, research proves that talking on the phone while driving is the equivalent of driving while slightly intoxicated. Driving while texting on your phone is the equivalent of driving while drunk. I was recently sitting at a red light when a young lady whose attention was momentarily diverted scraped my bumper. No one was hurt but the damage to my scraped bumper was still $1200 and the costs of repairing her car, I suspect, was much more.
To Do: Take a moment to think about how you could reduce lawsuit risks related to your lifestyle.

Insurance as your first line of defense. A number of years ago, a client and his family were driving to the airport in Denver, Colorado after a week of snow skiing. It was a beautiful sunny day with clear roads. Suddenly, he hit a patch of ice and his car slid into the oncoming lane. Fortunately, he and his family had buckled up and were not injured. Unfortunately, the two young ladies in the other car had not buckled up and both came through the windshield causing severe facial lacerations. They sued and won a judgment in excess of $700,000. If my client’s auto liability coverage had been, say $50,000, where would the young ladies’ attorney gone to satisfy the balance of the judgment? Answer: His personal assets. Fortunately, we had wrapped his auto and homeowners insurance with a $1 million Umbrella Liability policy.

In my experience, most people do not carry umbrella liability coverage, yet it’s perhaps the least expensive and most effective way to shield your assets from lawsuit. An umbrella liability policy typically has a very large deductible, say $300,000 or $500,000, but then covers any liability that arises from an auto or homeowners claim up to $1 million above your deductible. In order to avoid having a ‘gap’ in coverage, you’ll need to make certain that your auto and homeowner’s coverage limits are equal to your umbrella deductible.
To Do: Meet with your property and casualty agent and have him or her add an umbrella liability policy for a minimum of $1 million. This policy often costs less than $300 per year but you may have to increase coverage for your auto and homeowners insurance.

Creating Alternative Sources of Income

Over the past several weeks, I’ve discussed retirement strategies based on whether you’re in your twenties to thirties; forties to fifties; or are in your sixties with retirement just around the corner. To review those column’s go to the Resource Center at; click on ‘Links’; then ‘Stewart’s Column’.

One retirement solution everyone should consider is creating one or more alternative sources of income. While this may seem to be a daunting task, you may just discover that it’s easier than you think. Consider these success stories:

Years ago, a stockbroker discovered the love of running. While being a stockbroker provided the income to drive his lifestyle, for fun he began to organize runs with small groups of people on a weekly basis. One thing he noticed was that there were a number of novice runners who were interested in becoming more proficient and had goals of running in, and completing a marathon. He developed a novice running club and charged a small fee as he organized and taught a disciplined running regime that would prepare these novices for a marathon. He found that the club members loved the program and began to spread the word. He also discovered how much he loved combining his love of running with his new passion for teaching and seeing how it changed lives. Turns out that he wasn’t just teaching running, he was also teaching life skills.

A friend of mine was looking for an alternative income source; specifically he wanted something he could turn into passive income where his involvement would be minimal. He looked at many options and finally decided on an Internet-based discount retail purchasing web portal that allowed him to purchase everyday products at a discount plus add additional friends, family and other families where he would receive cash incentives for their purchases as well. If these new ‘customers’ also recruited customers, everyone would benefit. He worked diligently for three years building his new ‘business’ and today, spending only three hours per week has a monthly income exceeding $20,000!

Do you have to have a bunch of money to start up your own business? Consider a recent case. This gentleman in his late sixties was not content to drift into the sunset of retirement and, after much research, decided on a franchise business to buy. He had a great idea, a good business plan but lacked the capital to launch his business. He took the business plan to a group of investors who funded the project on a partnership basis.

What you should do. Make a list of all of the things that you love to do. Start with things that you are really passionate about. Note that for each item, there is someone who is making a pile of money with a business based on what you love to do. You could model them or create an innovative alternative. Brainstorm the possibilities and see what you come up with. In this economy, now is a great time to start a business. If you can make it work now, it’ll take off once the next economic boom gets under way. For more information about starting your own business, visit

Family Gifts Can be Taxing – Stewart Welch

A friend once called me with concern over a gift his parents made to his sister. His parents had given her $150,000 worth of stock to purchase a home. She then sold the stock and bought the home. The parents didn’t see anything wrong with this. After all, it is their money and they should be able to do with it what they please, Right? What they did not understand was that they created two potential tax issues. First, when the daughter sold the stock, she created a ‘realized’ gain and owes substantial capital gains taxes. Second, the gift created potential gift taxes that would be owed by the parents. To avoid this the parents must file a gift tax return and use a portion of their Lifetime Exemption Amount. The point is that care needs to be taken when making gifts to family members. It is possible to make ‘gifts’ even when you did not intend to do so. Let’s look at some typical examples:

· You add your child’s name to your savings or checking account. This is considered a gift the moment your child makes a withdrawal. If the withdrawal exceeds the allowed Annual Gift Tax Exclusion ($13,000 for 2010) it will be considered a taxable gift.
· You want to be certain that a particular person receives a specific piece of real estate at your death. Your solution is to add their name to the deed. When the deed is executed, you have just made a gift for gift tax purposes.
· You decide to buy a security such as a stock, bond or limited partnership interest and do so in both your name and someone else’s name. As soon as you designate the joint owner, a gift is deemed to have occurred.

Under each of the preceding examples where you created a joint ownership arrangement, at your death the entire value of the property is included in your estate. This is because you provided all of the financial consideration.

· If you guarantee a loan for someone else, you could end up being deemed to have made a gift for gift tax purposes. Assume that your child wants to start a business with start up costs of $95,000. Your child has no money or collateral with which to obtain a loan from the bank. You agree to guarantee the loan at the bank. By doing so, you have created a potential gift. The Internal Revenue Service has indicated that no gift is imputed unless there is an actual default on the loan that requires you to satisfy the debt for the benefit of your child. If this occurs, you are deemed to have made a gift for the full-unpaid balance of the loan less any repayments to you by your child.

Providing loan guarantees can also create negative estate tax results. If you’re involved in this type of situation, proceed with caution and get competent legal advice.

Portions of this article were excerpted (or modified) from Mr. Welch’s book, J.K. Lasser’s New Rules for Estate and Tax Planning.

Hop on the Bus for Free Financial Advice

Last week I discussed the importance of being prepared for the unexpected, specifically for incapacity. Another threat looming large is the dismal economy we currently face where layoffs continue to plague workers across the country. If you have money in the bank and a secure job, consider yourself lucky. Most Americans have little or no savings and are therefore unprepared for just about any hiccup in their financial lives. Well, help is on the way, again. Last year, three organizations joined forces to provide consumers with basic advice on personal finances. The Consumer Education Foundation of The National Association of Personal Financial Advisors (NAPFA), TD Ameritrade Institutional and Kiplinger’s Personal Finance magazine have developed a bus tour across America and are offering you free access to professional financial advisors to answer your most urgent financial questions.

The program is called Your Money Bus Tour and will be coming to the Metro Birmingham area this coming Wednesday. The bus will park at the Hoover Library where Hoover Mayor Tony Petelos will kick off the event at 11:30 a.m. and Director of the Alabama Securities Commission, Joe Borg will offer tips for consumers. The kickoff will be held in the café area of the library.

You’ll are going to have an opportunity to meet one-on-one with a financial advisor from NAPFA. These advisors are volunteering their time and typically charge a minimum of $150 per hour for their consulting services. This is a true community services outreach program, not a sales promotion. Each attendee will receive a free Financial Tool Kit. The services are free and it is an excellent opportunity for you to get a head start on your finances for 2010. While you are welcome to ‘show up’ for the event, it would be best to make an appointment which you can do on line at Appointments begin at 9 a.m. with the last appointment at 6:45 p.m.

Anytime you meet with a professional advisor, whether it is a financial advisor, attorney, accountant or banker, it pays to be prepared. By doing so, you make the most of your time and their time as well. This is especially important at this event since the advisors are expected to handle a large number of appointments throughout the day. Here are a few tips to help you prepare for meeting with one of the volunteer advisors:

Make a list of what you own and what you owe. Known as a financial statement, this provides a quick reference to your advisor (and you), where you stand financially.
Develop a simple budget. Your budget will outline your monthly income and expenses. Your advisor can use this to quickly identify where problems are occurring and offer some easy-to-follow steps you can take to get you back on track.
Documents you’ll need to bring with you. Credit card statements and any loan agreements such as an auto loan will help your advisor understand not only how much you owe but what interest rate you are paying and terms of loan agreements.

If you would like a free form you can use to list your assets and liabilities or complete a budget, go to the Resource Center at, click on ‘Links’, then either Asset/Liability Review or Detailed Budget.