Protecting Your Assets from a Lawsuit
In the movie U-571, an American submarine crew is charged with taking over a broken stranded German submarine during World War II in order to steal an enigma coding machine that will give them access to German naval secrets. The Americans disguise themselves as Germans coming to the aid of the broken down German sub. But their plan is discovered and another German boat torpedoes the American boat while half of the American crew is still aboard. They stand atop the deck helplessly as they watch the torpedo barreling toward them. At that point it is too late for them to do anything to stop the coming destruction, and all they can do is watch the torpedo as it collides with their boat.
A financial torpedo can appear out of thin air when it is least expected. We all work hard to save money, take care of our families, and plan for retirement, but all of this is a wasted effort if we don’t have measures in place to protect what we work so hard to accumulate. We live in a litigious society where it seems as though we can be the target of a frivolous lawsuit around every corner. There are plenty of horror stories about people being held liable and sued for unavoidable accidents. Since we cannot always avoid these issues, we must plan properly to protect ourselves and our families in the event we find ourselves on the wrong end of a lawsuit.
Insurance as an Asset Protection StrategyThe simplest and most cost effective way to protect ourselves from the ramifications of a lawsuit is the use of property and casualty liability insurance. Most homeowners’ insurance policies contain some level of liability coverage which provides the homeowner with a level of protection in the event someone is hurt on the property and sues the homeowner. Auto policies often provide some level of liability protection as well. However, these liability limits may not be sufficient to cover the total claim if serious injuries were incurred on the property by the plaintiff in a lawsuit. In order to obtain excess insurance coverage for full protection, purchasing an umbrella insurance policy should be the first step. These policies provide blanket liability coverage to the owner should they find themselves involved in a civil lawsuit. Umbrella policies can be purchased to provide $1 million dollars or more at a relatively low cost. But for some people, just an umbrella insurance policy may not be enough.
Asset Protection With LLCsFor individuals who own rental real estate, second homes, or other real property other than a primary residence, it may be worthwhile to take additional steps to protect themselves from liability. Placing property into a Limited Liability Company (LLC), removes the owner from potential liability stemming from accidents or other issues relating to that property.
LLC Asset Protection in ActionLet’s assume Bob owns a rental house and has $1 million of liability insurance on that house. His renter has a party, and the back deck collapses, seriously injuring four individuals. Each individual incurs medical expenses and decides to sue the owner of the house. If Bob is the owner and the total amount of the lawsuits is $3 million, well in excess of Bob’s $1 million insurance coverage, Bob is going to have some problems. If he is sued personally as the owner of the rental house, all of Bob’s other assets could be subject to claims in that lawsuit. His cars, his primary home, and everything else he owns could be in jeopardy. If Bob had simply created an LLC and made the LLC the owner of the rental property, he would have been removed from the lawsuit. The claimants would not have been able to sue Bob personally because he didn’t own the house. The LLC owned the house. Bob’s other assets would be safe.
Just as with many incidents we potentially face each day, the torpedo that destroyed the American U-Boat could not have been avoided. The difference for us is that taking measures to protect ourselves from liability can minimize the aftermath if we find ourselves in the path of a financial torpedo. The two simplest ways to protect our assets from lawsuits are insurance and LLCs.