High Risk

Protecting Asset from Legal Traps

Some "high-risk businesses" face additional exposure because they manufacture products that are widely used or provide services that require special expertise. Businesses may be subject to exposure for asbestos contamination, medical malpractice, product liability, or professional malpractice, to name a few. This article discusses suitability of various asset-protection techniques for certain individuals.

As part of the planning process financial and legal advisers must gauge a client's exposure to legal liability and be familiar with planning techniques appropriate to a particular client's situation. Insurance coverage, legal protection unique to certain assets, the way property is titled, choice of the type of entity for doing business, statutes, and legal planning techniques all can be used to protect assets from creditors. Ideally, a planning technique will also serve a sound business, estate, or family planning objective. Of course, as illustrated in the following example, the best technique for a given client depends upon his or her particular situation. E.g.: Shirley Richards, M.D., age 36, is a prominent neurosurgeon who lives in a major U.S. metropolitan area. She has two young children by his second marriage to Sam, age 35, and one child from a prior marriage to her ex-husband, Anthony. Shirley has a net worth in excess of $11 million. In addition to her pension plan, she has a diversified portfolio of stocks and bonds, and some undeveloped farm land in a prime location. Shirley is also a limited partner in an aggressive tax shelter that is being audited by the Internal Revenue Service.

The upper limits on Shirley’s automobile and umbrella liability insurance policies are $800,000 and

$2 million, respectively. John's umbrella policy is coupled with his underlying automobile and homeowner's insurance and provides catastrophic liability protection for automobile and personal (non-business) liability in the event the claims limits on his underlying policies are exhausted. Her cost for medical insurance has skyrocketed in the last couple of years. Considering, her substantial net worth and high risk, Shirley should consider implementing more than one of the Asset Protection Plans found in Table A & B below.

Techniques in Table A are mainly Statutory benefits available for ordinary

& high risk business & individuals.

They describe what property (or extent to which certain types of property) can be seized by a creditor with a legal judgment to satisfy a debt or used by a bankruptcy trustee to pay creditors. These exemptions are basic tools for fighting off creditors. (For purposes of this article, "primary creditors" shall refer to the IRS as collector of federal taxes and family creditors such as ex-spouses and children who are judgment creditors and are entitled to payments for alimony, child support and property settlement agreements. “Secondary Creditors” shall

refer to a1l other creditors. Primary creditors are given much greater legal powers to collect debts than secondary.

In contrast, the sophisticated techniques described in Table B require a substantial amount of advance planning and may involve legal agreements, the creation of new entities, or fractionalization of ownership. High-risk businesses and individuals such as Shirley’s should consider which of techniques are best suited to protect her economic interests.

When two or more individuals own an interest in the same piece of property, fractional ownership results. Fractional ownership is advantageous for a debtor because it makes the collection process more difficult. In some cases, the law protects a non-debtor's fractional interest in property that is owned, in part, by a debtor. Furthermore, a creditor typically will not want a fractional interest in property such as real estate that cannot be sold without the consent of a non- debtor co-owner. Even if debtor and non- debtor interests in the same property can be separated, the additional time and costs required to do so may persuade a creditor to settle for less, thereby discounting the original claim. In effect, fractional ownership creates special difficulties for a creditor and gives a debtor an extra layer of protection from legal claims.

Certain types of fractional ownership may create same problems for potential debtors as they do for creditors. An owner must give up sole ownership and control over an asset, including ability to easily sell it for cash. Once a fractional interest completed, it may be difficult or even impossible to unwind transaction. How well will the Table B techniques work in Shirley’s case? At very least, Shirley may be able to force any secondary creditors to settle for less, thereby discounting their original claims. However, short of 'fleeing the country, it will be difficult (if not impossible) for Shirley to escape her primary creditors.