Lawsuit Protection Part III: A Judgment Proof Portfolio

In the first two articles of this series we discussed what it means to be judgment proof, what it means to have assets, and how certain classes of assets are judgment proof by default.  But we are still missing something very important: How can we “judgment proof” unprotected classes of assets like cash, stocks, bonds, boats, collectibles, cars, airplanes, investment properties, and second homes?

Revisiting The Concept of Being Judgment Proof

In Part I of this series, we discussed why people with few or no assets are not good targets for greedy lawyers.  In Part II we recognized that we all want to acquire wealth and assets, and we briefly touched on certain classes of assets that have built-in asset protection features (e.g. homesteads and retirement plans, in certain states).  But what about the remainder of your assets–the assets that fall into a non-exempt category?  How can those assets be made judgment proof?

In other words, what happens when the physician described in Lawsuit Protection Part II has paid off her home and student loans, maxed out her retirement accounts, and now has $200,000 in unprotected assets?

To answer that question, we have to revisit what was discussed in Part I of this series: People who are without assets have nothing to give and, therefore, nothing to lose.  That is the critical insight.  They don’t own anything. Ownership is a legal definition.  By taking full advantage of that definition, a good asset protection attorney can help clients make otherwise non-exempt assets judgment proof.

Enter The Asset Protection Trust

A trust is a mechanism that separates the legal concept of asset ownership from beneficial use of that asset.  Think about the difference between being able to drive a car every day (beneficial use) as opposed to holding title to the same car (ownership).  The asset protection trust is a tool that allows for the separation of ownership and beneficial use.  By removing yourself as the legal “owner” of assets (but retaining the beneficial use of those assets), you can achieve one form of protection against unscrupulous attorneys, since they cannot deprive you of something you don’t technically own.

The way a trust works is that legal ownership of assets is transferred to a trustee.  The trustee manages those assets according to the terms of a trust agreement, which identifies the beneficiaries of the trust.  There are many different kinds of trusts, but they all have one thing in common: They separate the legal concept of ownership from the beneficial use of assets.  A person who creates and funds a trust is called a “settlor.”  When a settlor transfers assets to a trust, those assets become trust property.  If the settlor is personally sued at a later time, the assets held in trust are generally immune, because the settlor no longer owns them.

Other Considerations

• The law of trusts is very complex, and there are many exceptions to general rules outlined above.  Consult with an asset protection attorney to determine what will work best for your individual situation.

• Trusts that are created in the United States are not full-proof, however, and can be broken, which is why offshore trusts often play a critical role in asset protection planning.

• A good asset protection attorneys should always recommend multiple layers of protection against lawsuits.  One such layer is in the form of insurance.  Insurance is a good way to obtain peace of mind.  In some jurisdictions (but not all), juries are not informed of whether or not a defendant has insurance.  Without being able to make it look like a defendant is “bank rolled” by an insurance company, plaintiff’s lawyers can have a difficult time securing large judgments in non-professional suits  (e.g. car accident as opposed to medical malpractice).  As a result, it makes sense to buy and maintain as much personal insurance (as opposed to professional insurance) as you can afford, because what you are really buying is peace of mind and lawsuit protection (to the extent of your insurance coverage).