Many financial and legal myths circulate through society, and a belief in these myths may result in serious problems. In a commencement address at Yale University, President John F. Kennedy taught, “The great enemy of the truth is very often not the lie—deliberate, contrived, and dishonest—but the myth—persistent, persuasive, and unrealistic.” Mark Twain echoed this thought when he said, “It isn’t what we don’t know that kills us. It’s everything we know that ain’t so.”
Myth 1: I Will Never Get Sued
If you own a business, you have exposure to many types of lawsuits even if you personally have done nothing wrong. For example, if someone injures themselves on your property (even if he/she were trespassing), you as the property owner would be liable for damages through what is called premise liability. Last year the average premise liability verdict was $2,001,754—and an award of $2.5 million or more was just as likely as an award of $50,000-$99,999.
Business owners also have exposure to employee liability. You could be sued for workplace accidents, negligent entrustment, wrongful termination, gender bias, racial bias, sexual orientation bias, religious bias, sexual harassment, and racial harassment. A big risk in this category for business owners is a workplace accident. For example, one employee received an award of $86.7 million to compensate him for an accident at work that left him paralyzed (Miraglia v. H & L Holding Corp.).
If your business involves trucking, you are liable for any injury caused by the trucks. Last year the average award in a motor-vehicle case was just under $1 million, but if the injuries are severe or result in a death, the judgment can be much higher. Last year the average wrongful death award was $11,804,650. In one case, a trucker was backing up and hit another trucker walking in the area, causing permanent disabilities. A lawsuit followed, which resulted in a $55 million verdict (Ritter v. Stanton).
It is essential to have the legal structures for lawsuit protection and prevention in place before you are sued. If you are not properly structured, it only takes one lawsuit to lose everything. The American Society for Asset Protection can help you.
Myth 2: I Should Operate My Business as a Sole Proprietorship
Many attorneys and accountants recommend that their clients operate their business as a sole proprietorship because of the simplicity it presents when they file their tax returns. However, there are two major problems with operating as a sole proprietor. First, while a sole proprietorship allows a person to deduct most business expenses, there are tax deductions and reduction strategies that apply to S-Corps and C-Corps, which cannot be used as a sole proprietor. The second major problem is that a sole proprietorship provides little protection against lawsuits. If your sole proprietorship is sued, all of your business and personal assets could be taken to satisfy the judgment. Even if you are sued personally as a result of a car accident or injury at your home, all of your business assets are at risk of being taken.
Myth 3: A Corporation Protects My Assets from Lawsuits
The corporation is a good management and tax reduction tool, but it is a poor lawsuit protection tool. If your corporation is sued, all of the assets (with equity) owned by your corporation can be taken to satisfy the judgment. The corporation does provide some protection of personal assets with what is called the “corporate veil.” The corporate veil is supposed to prevent a creditor from going after personal assets to satisfy a business debt. However, the corporate veil is often pierced, enabling your personal assets to be seized to satisfy a judgment against your business.
Myth 4: Asset Protection Is Not Possible
We live in a very specialized world. For example, doctors specialize in a specific area of medicine (orthopedics, radiology, cardiology, etc.). There is no difference in the legal world. There are specialists for every part of our legal lives. There are attorneys who specialize in patents, family law, bankruptcy, personal injury, prosecution, estate planning, etc. Asset protection is a highly specialized area of law. A survey by the American Bar Association showed that less than one percent of attorneys claimed asset protection as their specialty. As a result, most attorneys and accountants are unfamiliar with the strategies and tools available to protect 100% of your business and personal assets from being seized in a lawsuit.
Myth 5: I Should Put My Assets in My Lower-Liability Spouse’s Name
One of the strategies recommended by less-than-experienced advisors is to put assets in a lower-liability spouse’s name. This may provide a modest amount of protection in the event of a lawsuit, but there are four significant drawbacks to this strategy. First, it must be realized that courts carefully scrutinize conveyances between relatives and can invalidate the transfer of property regardless of when the conveyance took place. Second, your spouse may be declared an implied officer in your business and be named in a lawsuit. Third, your spouse could get sued personally. For example, if your spouse were involved in a car accident and someone was killed, a lawsuit would most likely follow; and every single asset in the spouse’s name would be at risk. Finally, having assets in your spouse’s name can cause serious problems in the event of a divorce.
Myth 6: I Only Need a Single Entity (LLC or Corporation)
Typically, a combination of entities will be the best course to take, rather than the use of one corporation or LLC. Most advisors are unaware of how to gain the best tax advantages and ensure 100% asset protection through the use of multiple entities. To ensure your assets are protected, you must separate your safe and risky assets into separate legal entities. The strategy of using multiple entities will minimize taxes and protect 100% of your assets.
Myth 7: Liability Insurance Will Protect Me Against Lawsuits
You may feel you are protected from lawsuits because you have liability insurance; however, insurance is like a hospital gown—you only think you are covered. Liability insurance does provide some protection against lawsuits, but it is limited in its coverage. Juries often will award judgments in excess of liability insurance coverage. Exclusions in your policy may also result in your insurance company denying coverage and leaving you liable. As judgments have increased over the years, some advisors simply tell professionals to get more liability insurance. This is problematic, as larger policies are costly and often serve as homing beacons for trial attorneys, who look for the deepest pockets in which to reach.
Myth 8: My Local Attorney Can Set Up My Asset Protection
Even though there are more than one million practicing lawyers in America, less than one percent claim asset protection as their specialty. In fact, many legal and financial professionals simply do not have the specialized knowledge required to implement all of the right strategies, entities, and document language needed to provide 100% asset protection. Attorneys will often use language in their documents that will actually hurt the clients in a lawsuit. In recent years, many attorneys have expanded their practices to include asset protection or, if asked, will tell you they can do the work for you, but most have minimal experience and expertise on the subject. If your personal attorney has not already recommended that you place your assets into properly drafted family limited partnerships, isn’t it time you question his or her asset-protection expertise?
Conclusion
The authors of the book The Millionaire Next Door did an extensive study of millionaires to find the determining factors that resulted in a high net worth. The research concluded that hiring high-grade financial advisors was directly related to the propensity to accumulate wealth. An attorney who specializes in asset protection is one high-grade advisor professionals need. An asset protection attorney will ensure you avoid the myths in this article and will ensure your assets are properly structured for lawsuit protection, tax reduction, and estate planning. The American Society for Asset Protection works with the highest grade and most experienced asset-protection lawyers in the country.