Have you heard of the homeless man who was sued for $5.5 million? Of course you haven’t. Lawsuits aren’t filed against those with few assets; they are filed against those with “deep pockets.” If you have substantial assets or are coming into a windfall from a sudden wealth event such as an inheritance, lawsuit, stock options sale, business sale or from a sports/entertainment contract, there are several money moves you should consider to best protect your new wealth against lawsuits and from others.
1. Increase your liability insurance. Your first line of defense in litigation should be insurance. Call your insurance broker and increase your liability limits. Make sure your personal umbrella liability coverage is for an amount at least equal to your new net-worth. For example, if you are going to receive $3 million from your Aunt Jane’s estate, tell your insurance broker that you want a $3 million umbrella liability policy. Rates are inexpensive – often $200 or $300 per $1 million of coverage. Bruce Givner, a Los Angeles tax attorney, recommends that his clients have a minimum of a $5,000,000 umbrella policy, and most of them opt for $10,000,000.
Tip: It’s best to make this five minute phone call before you receive the inheritance or windfall.
2. Consider keeping assets separate. Depending on the state in which you live and the source of your windfall, if you deposit the money into a joint account with your spouse, this money could instantly become half theirs. For some, this isn’t an issue, but for others, this could pose a problem. For example, if you have children from a previous marriage and commingle an inheritance you receive with your new spouse, your children may get less than you expect when you pass away. This problem becomes even more damaging if you are contemplating a divorce.
Tip: If you don’t want your spouse to have ownership of your windfall, talk to an attorney and keep the assets in a separate account.
3. Protect yourself from renters. If you have rental property or expect to invest in rental property after receiving your sudden wealth, create a business entity such as an LLC or corporation to shield your other assets from a disgruntled tenant. By doing this, if your renter sues you for $5 million, they can attack the assets in the entity that holds the real estate but the rest of your personal assets are protected.
Tip: Create a separate business entity for each rental property or consider a Nevada or Delaware Series LLC, which is designed to protect each property within a single LLC.
4. Review all jointly held accounts. Any money you deposit into a joint account with your children, elderly parents, roommate, or business partner is at risk. If the joint owner files for divorce, incurs a tax lien, or lawsuit judgment, the entire account could be wiped out.
Tip: If there is a need for a joint account, keep the balance as low as possible.
5. Formalize informal partnerships. Business partnerships are ticking time bombs. Why? Just like joint accounts, you are responsible for the actions of your partner. But unlike a joint account, a lawsuit against your partner can put all of your assets at risk. For example, suppose you and a friend have an informal agreement to partner and provide consulting services. If your partner is involved in an accident on the way to a client, your personal assets can be in jeopardy.
Tip: Avoid partnerships. Form an entity such as an LLC or corporation to provide you with legal protection.
6. Create business entities to shield assets. If you have a small business or do part-time work on the side without having a formal business structure such as an LLC or a corporation, you are operating as a sole proprietorship. The “sole” means it’s just you, so unlike a partnership, you don’t have to worry about a partner’s actions . . . but all of your personal assets are at risk if you are sued.
Tip: Create a business entity that shields your personal assets from lawsuits against your company.
Sudden wealth can be a life-changing experience that can improve your life and the lives of those around you, but only if you keep it. Those with more assets are bigger targets for lawsuits. Don’t let your sudden wealth suddenly get stripped from you. Protect your assets before you get the windfall and you will sleep a little easier knowing your assets are better shielded.
Connect with me on Twitter @rpagliarini, Google+, or email me at [email protected] This discussion is not intended as financial, legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified professional.