Estate Planning, risk management in unprecidented times

By Ray Chodos

Liability nightmares What could go wrong?

Many otherwise well-informed persons take comfort in the notion that if a serious liability arose, that their quality insurance policy would cover their liability since they pay significant annual premiums. Sometimes upwards of $100,000 annually. If there are gaps or exclusions, often, the policyholder is unaware of them. Liability exposure can destroy any family’s financial security for events they did not participate in, or, were even aware of.

Divorce. Marriage can be a blessing, but works only about half the time. A prenuptial agreement is a good idea, but the courts routinely fail to uphold them. An experienced asset protection specialist would suggest that your best protection is to establish a separate, private financial life for each spouse. The price of falling in love should not include the loss of your major assets if the marriage ends. Business breakups can be even more acrimonious than marriage breakups. Sophisticated Operating agreements are a specialty practiced by few lawyers and generally visited only when a dispute is already in play.

Taxes. An IRS tax audit may leave one with a large assessment for taxes, penalties, and interest that you are unable to pay and that are not dischargeable in bankruptcy. The cost of challenging the IRS in court is prohibitively expensive for most people, and your assets are frozen if you choose to grind your case through the court system. It is possible to "legally and morally " hold your assets in an entity where the IRS cannot seize them.

Medical Expenses. Unanticipated medical bills for you or a family member that are not covered by your health insurance policy can become staggering. The best debts to take to court as a creditor involved unpaid medical bills. The debtor, or a member of his or her family, could not argue they never contracted for or received the services. If the debtor didn't go the personal bankruptcy route, the creditor would get 25 percent of the person's paycheck until the debts are paid.

Negligence Lawsuits. These types of lawsuits are quite common and can be filed by anyone that feels in some way damaged, the customers of your business as the result of the activities of your employees. Your delivery driver accident with a school bus is your responsibility. Negligence as a concept is often subjective as to what someone should have foreseen and didn’t. we carry insurance, but what if your liability exceeds policy limits ...or, the loss is excluded in the policy language you never read, (environmental, punitive damages) or the insurer refuses to pay? This is not a rare occurrence. Negligence claims are difficult to defend in an age of expanded theories of liability. What is the “standard of care “ for every possible situation? The Trump impeachment fiasco demonstrated defense theories that seemed unreasonable proffered by creative litigation lawyering. This strategic approach also is commonplace in US courtrooms.

Employment practices, discrimination, and Sexual Harassments Suits are common place currently. Difficult to defend, as proving innocence or guilt is often not documentable. Cases often settle to avoid uncertain trial outcomes. This is an exploding growth area of litigation, which almost always favors the plaintiffs.

Failed Business Venture. A business partner, and friend can become your worst enemy. IRS agents have stated that the primary source of independent informers on tax cheats (even stolen commercial software or violated licenses to name another examples) are ex-wives or girlfriends (includes ex-husbands and boyfriends as well) and ex- business partners. And as anyone with a family business knows, blood is not always thicker than water.

Loan Guarantees. If you sign as a personal guarantor for a loan to a family member or friend, and the loans go into default and the lender sues you. This is an example of an uninsurable liability.

Should a client understand under what circumstances a court may redistribute one’s wealth to others involuntarily? Not many wealth holders are likely to be well versed in this area? Business disputes, family disputes, predatory litigation, personal liability and dozens more clog the courts every day. 15 million civil (50,000 daily) suits are processed annually in state courts alone. The amount of redistributed assets as a result of civil judgments and awards (US) is $ 200 billion annually. Many of the risks are not insurable, the rest have internal policy limits to cap insurance company's risk exposure. 25% of all US businesses have an active litigation ongoing at any given time. Many insurance agents are not well versed in legal asset insulation. Most major assets including investment portfolios are often titled in personal owner’s name; thereby completely vulnerable to attachment. It is possible for a single jury verdict award to destroy any family’s financial security for alleged events they may not have directly participated in, or even knew about.

What can legally be done to insulate wealth?

Professional asset insulation plans include the removal of the financial incentive that drives most litigation and lawyers. Legal entities that resist attachment, series of insulation steps to separate beneficial ownership from legal liability, segregation of risk prone assets are all components of building impediments to attachment. None of the techniques involve giving up control of assets, or obviate income taxation. These programs often do reduce estate tax valuation of major assets as a side benefit.

Ray Chodos and Adam Chodos, JD, CPA are members of the Wealth Preservation, LLC, a Greenwich, Conn. Based firm that specializes in serving the asset-protection concerns of business owners, Wealth holders, and their advisors. www.WealthPreserve.com. Ray Chodos can be reached at Chodos@WealthPreserve.com.