Could you lose all you have to a lawsuit?Article added by Ray Chodos on February 9, 2012
Ray Chodos

Ray Chodos

Greenwich, CT

Joined: February 01, 2012

Co-authored by Ray Chodos and Adam Chodos, JD, CPA

When you consider how often we buy, sell, rent, employ, borrow and disagree with others, it is difficult to imagine not ever being named in a significant litigation claim.

Closely held businesses are vulnerable to litigation risk since most do not have internal human resource, legal or risk management departments. The owner managers generally wear many hats and tend to react to issues as they occur, rather than through proactive prevention.

Perhaps the most insidious risks are from employment practices brought by your own employees. The cost of defense against harassment, wrongful discharge or discrimination can exceed $100,000, even if you win. Wealth holding families are vulnerable to losing much of their wealth as a result of legal action, accident or catastrophic illness. The use of strategic planning incorporating trusts, limited partnerships and limited liability companies domiciled in favorable jurisdictions can keep litigants and creditors at bay.

Litigation lottery

Common sense dictates that a society’s legal system should discourage wrongdoing by imposing punishment and reparations on those so deserving. Our legal system has been manipulated and reconfigured to the point that only those that can pay are sued, so as to produce financial rewards for claimants and their lawyers. Affluent people are more likely to be linked by creative lawyers to being legally responsible for damages, even if the correlation is quite indirect.

If you sue enough affluent defendants, you will likely eventually get a settlement or judgment in your favor. Litigators scrutinize the respondent’s ability to pay before even the merits of the plaintiff’s complaint, lest they risk being uncompensated.

The legal system to which we all are subject is not intuitive, and results in often unpredictable results having serious impact on affluent families under the noble mission of “righting a wrong.”

Divorce is an unfortunate eventuality of nearly half of American marriages. Rarely is such an event smooth, and the ultimate result is often settlements perceived to be unfair by both parties. Business and professional relationship disputes have a similar perilous potential with each party positioning for advantage in the reconstituted remaining business. Civil tort litigation facilitated involuntary transfers of over $235 billion of wealth in 2008 alone.

Sue over what?

When you consider how often we buy, sell, rent, employ, borrow and disagree with others, it is difficult to imagine not ever being named in a significant litigation claim. Many serious risks like divorce, business co-owner disputes and employment wages are not insurable. For the events that are insurable, there are exclusions, exceptions and monetary claim limitations on all policies.

What is discrimination exactly? How about harassment? When is it wrong to discharge an employee, and how should it be done? If you are a professional, your malpractice or errors and omission coverages are limited. As an executive in a larger company, you can be personally responsible for the accuracy of corporate financial reporting (Sarbanes-Oxley).
In the final analysis, any unsatisfied claimant can theoretically engage the best lawyer on a fee contingency basis (no cost to plaintiff) to intimidate and litigate anyone with the means to pay by linking that party somehow to the damage causation. Many claims are settled without trial to avoid embarrassment, discomfort and risk of verdict. Naturally, this practice encourages more litigation.

What can a reasonable person do to insulate against financial ruin?

We cannot predict all events that may cause someone to feel damaged by us in some theoretical legal way. We cannot prevent being named in a litigation sweep that covers anyone connected to the claimant’s event. We cannot make ourselves paupers in order to be in a position to not lose something of value. We can title our major assets in such a way as to become unattractive to litigation by removing the financial gain incentive.

Titling of assets may incorporate legal entities that preclude attachment to underlying assets of the entity. All states offer limited liability companies, limited partnerships and dozens of various trusts; some jurisdictions are more favorable to asset owners than others in the United States. Offshore jurisdictions offer laws that are even more effective since they are immune from U.S. judicial rulings.

A series of legal obstacles and impediments discourage claimants and their legal representatives from suit and promote negotiation by removing the financial gain incentive. A well-designed program retains all major assets and control locally while domiciling the legal entity that would need to be sued in a favorable jurisdiction.

To reduce attraction to deep pockets, entities holding major assets generally do not identify the owner family name. Also, a revocable living trust in lieu of a will avoids public exposure available to anyone that wishes to read the document once probate is complete. Should outsiders be privy to who got what in your family? Revocable trusts do what a will does, and more in the event of incapacity, without the public probate process. There are administrative and probate cost avoidances when revocable trust is used in place of a will.

Asset protection has become as common as estate planning for affluent clients aware of the perils. Wealth preservation planning can and should be incorporated into estate planning, business ownership succession and financial planning efforts. The cost associated with quality planning as described above is several days of the asset owner’s time devoted to learning so as to enable informed choices.

The professional fees are generally $6,000 and up, depending on complexity and degree of risk exposure. The cost is modest in relation to the legal and time cost of defense of even one event, even if you win. Aside from health, what is more important than protecting all we own?
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