Asset Protection--How to Avoid Losing Your Fortune to A Lame Lawsuit  

Just about everyone is a potential target for a lawsuit these days. Here are some facts about the legal climate today. Over 19 million lawsuits are filed in the U.S. each year. We have 5% of the world's population and 80% of the world's lawyers. Ninety percent of all lawsuits in the world happen right here in the U.S. And it's getting worse. According to the American Bar Association, there are close to 700,000 lawyers in practice at present. That's one lawyer for every 400 residents!

So if you own a business, own investment properties or practice a profession you have a one in three chance of being named in a lawsuit THIS YEAR!

It used to be that people didn't worry about frivolous lawsuits when they weren't at fault. That's not the case any more. Remember the woman who was awarded over $2 million in a suit against McDonalds' because she spilled hot coffee on herself? It's these kinds of awards that prompt people to file spurious or questionable lawsuits. The challenge is that most lawyers handle these cases are on a contingency fee basis which means clients don't pay a dime unless they win or settle the lawsuit. When there are no upfront costs to file a lawsuit, there's nothing preventing them from making a frivolous claim.

So with that being the mindset of the general public it's obvious why you need to protect yourself.

What Is Asset Protection and How It Works

Now if you have read anything on asset protection there are two basic questions you should ask yourself:

1. Does it work?
2. Is it legal?

So now let's talk about what asset protection is. How it works? And answer these two questions.

Essentially asset protection is a legal way to put your assets beyond the reach of those who want to take them from you. Here is an example you are familiar with that demonstrates its effectiveness and legality.

Remember the O.J. Simpson case? O.J. went to trial in 1995 and was acquitted of murder charges. His story is a perfect example of how and why asset protection works. Now there's a whole criminal side to O.J.'s case. So let's put aside the moral issues here. We're just talking about asset protection. The point here is that the nation was able to see for the first time how an alleged murderer was able to have a judgment entered against him and no one was able to collect any money. So let's outline what happened. By the way, do you know how O.J.'s doing now? Do you have any doubts he's living all right?

He moved to Florida because the golf was better, the private schools were nicer and frankly the people in Los Angeles didn't want to talk to him anymore. But no one's collecting any money from O.J. As we go through this, you'll see how O.J.'s team of experts used many asset protection strategies effectively. After he was acquitted from the criminal charges, the Goldmans sued him on a wrongful death case and obtained a judgment for $33.5 million. Yet have they collected anything? All they got was his Heisman trophy. The piano he said belonged to his mother. But what happened to his money? Well he was lucky. O.J. had pension plans through the NFL and the Screen Actor's Guild, and pensions were exempt from judgments by law in California. He had about $4.2 million in his pension plans, which throws off about $25,000 a month. That's how he pays his greens fees for golf and how he sent his kids to private schools.

What about his house? He had a nice home near Beverly Hills. The house was worth $3.5 million. He had a mortgage for $1.5 million. The question everyone asked was what happened to the rest of the equity? Why didn't they take it?

Well, he had what are called friendly liens placed on it. By the time they got to the house all the equity was encumbered in favor of his attorneys. His home was leveraged to the hilt so by the time the Goldmans got to it there was nothing left for them to take. There was also the homestead exemption, which in California is up to $125,000.

Now that he's living in Florida he has a boat, an office, a car. People wonder how he has all these things.

He leases these things. You see, by law no one can seize a leasehold interest.

So back to the two questions we started this example: does asset protection work and is it legal? Well, how's O.J. doing so far? He's doing just fine. What about its legality? Remember this was the most publicized trial in U.S. history. It was under total scrutiny from the media, the public and legal professionals everywhere. People were itching to put this guy behind bars or at least force him to pay in dollars for what he allegedly did. They couldn't because his assets were protected within the law.

Another question critics of the O.J. case bring up is this, if most of the money he has is protected from judgments and bankruptcy, why doesn't he just go bankrupt and release the $33.5 million judgment? One reason is you must submit a list of all your assets when you file bankruptcy. If you leave something off, you can be indicted for bankruptcy fraud. There is only one logical explanation why O.J. doesn't file bankruptcy. It is because he likely has money offshore. This is the part you probably won't find in any books or media. O.J.'s mother lode is purported to be in the Isle of Guernsey, probably $5-10 million. Now he's not going to go bankrupt and leave this off the list and then have some angry girlfriend tell on him and get him indicted and sent to prison.

The Nuts And Bolts for Effective Asset Protection

To be truly effective, all asset protection strategies must meet three criteria.

1. Liability Protection. You must be legally protected from any liability.
2. Control of the assets must be totally anonymous and private. You see, if assets can't be legally tied to you then they can't be taken when someone comes after you. So to achieve this protection you have to set up your asset protection and privacy plan in a jurisdiction that supports these criteria.
3. The third and most important criterion for effective asset protection is that it must be done at the right time. You must act ahead of time to protect what you own BEFORE it comes under attack. Once a lawsuit is expected or has been filed, the law will not allow you to move your assets.

So as we talk about different types of asset protection we will come back to these important criteria.

How to Achieve Asset Protection

The best way to achieve asset protection can be summed up in three words: Don't Own Anything.

Now you might think that this flies in the face of the American Dream which says you need to own your own car, home and everything else that is a prerequisite for a happy and successful life. Now we are not talking about not eliminating debt on those assets. It's great to be debt free. You just don't want to own those things in your own name because if you technically don't own them, but merely control them, then the assets are well protected, and you still have the use of them. You see, you don't want ownership. Ownership is a liability. What you want is use of the assets. In fact it was John D. Rockefeller who summed up this philosophy when he said "Own nothing and control everything." So to really start to understand the mindset around asset protection you need to think like a Rockefeller.

One way to achieve this protection is through the formation of corporations to hold the assets. Why corporations? Under the law, a corporation is an artificial "person" completely separate from the people who own it and control it. This is different from an individual. An individual bears full and complete responsibility for his actions. But a corporation is an independent entity. A corporation's liabilities and taxes are separate from those of its owners and officers. Therefore a corporation gives you the greatest personal liability protection and this meets our first criteria.

Because of the corporate formation laws in certain jurisdictions, you can form corporations that can provide total privacy. This is why almost all successful people choose to incorporate. It permits you to manage your assets anonymously. Your private corporate life is never made public. And there's only a couple of states and a few places around the world where a corporation can be formed, while you own and control it, your identity and ownership can remain a total secret. This meets our second criteria mentioned.

One of the jurisdictions is Nevada. Nevada was just a desert with few residents until the mobs came and started the casinos. The mobs did not want anyone to know who owned the casinos and they made sure the law allowed ownership to be untraceable. The mobs had since gone and Wall Street had taken over. Nonetheless, the corporate formation law has not changed. If you know how to structure it, you can incorporate in Nevada and no one can trace the ownership of the corporation back to you.

Another jurisdiction is the Bahamas. An international business corporation (IBC) formed in the Bahamas can remain anonymous if you structure it properly. You can use the Nevada corporations to protect fixed assets such as homes, boats, and some liquid assets. You can use a Bahamian IBC for large amount of liquid assets such as cash, stocks, and bonds. For most people, a Nevada corporation will be sufficient. However, for maximum asset protection, a high net worth individual will want to utilize both types of entities.

You may be asking why Nevada and the Bahamas are so unique. The answer to that comes back to our criteria of privacy. You see both these jurisdictions allow their corporations to use two unique features: bearer shares and nominee officers. Bearer shares are shares of stock that are legally owned by whoever holds or "bears" the actual stock certificates. So anyone who doesn't hold the stock certificate in his possession is not the legal owner, and can so testify in court. So you may be driving a BMW owned by a corporation, but if you don't have the bearer shares or stock certificates for that corporation, it's not really your car. You're just using it. And this eliminates your liability.

The other feature is nominee officers, which ensures your complete anonymity. A nominee is simply a trusted person you appoint to stand in and provide his name and signature in lieu of yours. Both Nevada and the Bahamas allow the use of nominee officers and directors in their corporations so your name will never appear on any of the corporate documents if you so choose. Your identity can be kept completely private.

Now the corporations you form there cannot and should never be used to evade federal taxes since all U.S. residents and citizens must pay federal income tax on their worldwide income. However, there is no state income tax in Nevada and there is no income tax for IBC's in the Bahamas.

An Example on Implementing Asset Protection

Let's assume you sell a product and someone wants to sue you. A customer was slightly injured by a product that he bought from you so he goes down to the local injury attorney and tells him the story. The lawyer says great! We'll sue him. Let me do some research and we'll talk tomorrow

The lawyer then orders a preliminary asset search on you. When this report comes back, on the top of the page is your name, underneath that is your date of birth, your address, your phone numbers, listed and unlisted, any children you have and their names and ages. Below this is the Nationwide Asset Sweep listing all property you own, brokerage accounts, bank accounts and tax information.

When this disgruntled customer returns to the attorney the next day the attorney will say one of two things:

1. "Great, all the assets are right here. Let's draft a complaint and sue this guy" or
2. "I can sue this guy but there are no visible assets to go after...I can start proceedings if you want but I'll need a $15,000 retainer to cover my initial fees and expenses."

Based on human nature, 99% of all litigations will stop right here. Contingency fee lawyers need a pot of gold at the end of the rainbow. They're not interested unless there is the potential for a big reward

So you want to be in the second category where you are not at risk.

So to start off, let's assume you have a home worth $500,000 and you have $150,000 in stocks and bonds in your brokerage account. On your home you have a mortgage for $300,000. You have $200,000 in equity in the home and $150,000 liquid assets exposed. So what do you do?

First you would form a Nevada corporation anonymously.

Do you transfer title of the home into the Nevada Corporation then? No, for a few reasons: One is you want the home to stay in your name. It becomes the decoy. You see, the first things a competent attorney will ask are:

1. Does he own a home?
2. Does he have a job or own a business?

If you are living a six-figure lifestyle and you don't own a home he's going to assume your assets are hidden and may want to go digging. However, if you own your home and it's mortgaged to the hilt, well, that's not so unusual. The other reasons you want to retain title to your home is for tax deductions on mortgage interest, capital gain tax exemption when you sell your home and the protection you already get from homestead exemption in your state.

Instead of transferring title, you can place a friendly lien on the home for $220,000 and record it in favor of your Nevada corporation. A friendly lien is a legal lien placed on a property and it doesn't necessarily represent a cash loan from the Nevada corporation. The Nevada corporation may have rendered professional advice or services creating the debt owed to the corporation. At any rate, it serves your purpose of encumbering any remaining equity in your home.

You can then transfer the $150,000 in your stock portfolio to a Bahamian corporation under your management with a brokerage account in the Cayman Islands. You still retain control over all the assets yet they are now invisible to the predatory eyes of an attorney.

So between the Nevada corporation and the IBC you have effectively eliminated your exposure to liability and your assets would no longer show up on an asset search, keeping you safe from lawyers.

As powerful as these strategies are in protecting your assets from lame lawsuits, they must be put in place long before any legal challenges surface. Any asset transfers you make after a legal challenge will be considered fraudulent conveyance and will be set aside by the courts. Therefore, if you feel you are a potential target for future lawsuits because of your profession, the nature of your business or your investment property holdings, the time to act is now.

About the Author

Carlos Lee, MBA, is the senior consultant for Asset Protection Consulting Group.

Visit www.apcg.net to learn more about how to bulletproof your assets against future lawsuits.