You’ve worked hard to get where you are. And if you’re like most of us, you’d like to make your financial situation even more secure.

Unfortunately, we live in a society that’s home to 94% of all the world’s lawsuits. Anyone living in America today has a one in five chance of being sued, and one out of every three doctors has been hit with a lawsuit. (Be especially thankful you’re not an obstetrician – a recent study showed that 80% of them have been sued.)

Many people don’t understand just how much is at risk in the event of a lawsuit. The reality is, everything in which you have an ownership interest is in danger. This could include:

• your home
• the value of your business, including patents, trademarks, and accounts
• your Individual Retirement Account (IRA)
• any savings, investments or property.

Given the disturbing odds of being sued, you’re clearly better off making the effort to protect yourself – and your loved ones – by shielding your assets as much as the law will allow.

You can start by taking some preliminary steps that will allow you to assess your liability risk profile, identify which assets are more vulnerable than others, set some planning priorities and determine how to proceed.

• Prepare a personal financial statement
. List the value of as many of your assets as you can, including personal property such as home furnishings, jewelry, tools and anything else of value – even if you’re not sure what you paid for it. Don’t forget the cash value of your life insurance policy and retirement accounts. Also include the value of your practice and any other business you own, plus any investments you have. (These will need special protection.) Then list all the debts you owe and their current balances. The difference between the total value of your assets and your debts is your net worth.
• Examine your retirement assets
. It’s important to do this with an asset protection attorney who knows which, if any, federal and state exemptions will apply to claims made by creditors and lawsuit adversaries. For example, in some states IRAs are exempt from creditor claims but vulnerable in a divorce. In others, IRAs are vulnerable in both kinds of legal actions.
• Assemble a list of your insurance coverages
. This should include liability coverage. Take a close look at what’s covered – and what’s not. The results may surprise you.
• Decide which assets you and your family can’t afford to lose
. Do this by ranking your assets from irreplaceable to easily replaceable. This will give you a better planning perspective and tell you which assets may need special protection.

Keep in mind that you not only want to preserve your assets in case of a lawsuit; you also want to minimize taxes and pass what you don’t use or spend on to your heirs in the most tax-efficient manner possible. So your next step should be to:

• Review your estate planning documentation
. This should include any current living trust and/or life insurance trust, as well as your will, any powers-of-attorney and any physician’s directive regarding artificial life support (or "living will"). Be sure to review these with a qualified attorney.
• Review marital property agreements
. Look over any community property or pre- or -post-marital agreements which you’ve signed (or need to sign). You may need to review these to see how they’d fare in a divorce or major lawsuit.
• Carefully review benefits intended for others
. Life insurance death benefits will pass income-tax-free to the policy’s beneficiaries, but the amount paid out is included by U.S. tax law in the "taxable estate" of the insured decedent. To avoid this, make sure the policy is owned by an irrevocable life insurance trust. This can also protect life insurance cash values in the event of a lawsuit or an unfriendly divorce.

Two other pieces of advice before you start considering your asset protection options:

• Get help from the right person
. There are plenty of self-appointed (and unlicensed) asset protection "specialists" out there. (Some are on the internet.) For your own good, it’s best to work with a licensed attorney who actually practices in this field. This is a complex legal area that requires specialized knowledge and experience. Look for someone who does quality legal work, is ethical and won’t circumvent the law, and has a background in estate planning, tax planning and finance.
• Keep your perspective
. Remember that asset protection is about preserving value in the face of future claims and lawsuits. It’s not a tax scam and it doesn’t involve the defrauding of legitimate creditors.

Asset protection generally involves the formation of different types of legal entities, often in different jurisdictions both inside and outside of the United States. These take advantage of different state laws, as well as foreign laws which make it more difficult – or impossible – for a litigant to confiscate your assets. For example, you could have your main business revenue source located in your state of residence but use other entities domiciled elsewhere to serve as "layers of the onion" to keep high-value assets protected. These might include:

• An asset protection trust (APT).
This can be domiciled in an international jurisdiction, such as the Cook Islands, the Bahamas or Nevis, in which the orders of a U.S. judge and U.S. courts will have no binding legal effects. There are several advantages to an APT:
• The trustee is not subject to U.S. jurisdiction, and has no obligation to anyone other than you and the other beneficiaries of the APT.
• In most asset protection jurisdictions, claims of prospective future lawsuit adversaries are effectively cut off by a statute of limitations after 2 years.
• In some jurisdictions, a plaintiff may have to file a cash bond of $25,000 or more with the foreign court that has jurisdiction over the APT before proceeding. Under the "loser pays" system adopted in most such offshore jurisdictions, this amount is a monetary deposit to cover your APT’s defense costs.
• Most offshore jurisdictions outside the U.S. don’t permit contingency-fee lawsuits, in which the attorney is paid on a percentage-of-recovery basis. In other words, your adversary would have to pay out-of-pocket for legal counsel, usually in advance. It could easily cost your adversary $100,000 or more to pursue the protected assets through the foreign courts, while facing the real possibility that he won’t recover anything at all.
• A family limited partnership (FLP).
This option is becoming more popular as a method of both asset protection and tax-advantaged estate planning. In an FLP, the limited partner interests (which can constitute 99% of the total value) can be protectively held either by:
• an offshore APT (our first choice)
• an irrevocable children’s trust (our second choice)
• your children directly (our third choice).

• A limited liability company or preferred-jurisdiction company
. These can help to shift liability risk and offer tax-planning opportunities, depending on your circumstances.
Limited liability companies (LLCs) are a hybrid of partnerships and corporations, a concept recently imported from Germany. They offer a high degree of liability protection and have the advantage of pass-through tax benefits (meaning that tax write-offs can be "passed through" to LLC members). As in the case of an FLP, the majority of ownership interests can be assigned to an APT for better protection from lawsuits. Like a corporation, an LLC is a separate legal entity from you. It can therefore separately own those selected assets you want to protect. It can reduce liability risk from lawsuits and prospective creditors, and also take advantage of tax-planning opportunities. Low or zero-tax jurisdictions, such as Nevada or Wyoming, are preferred for this type of planning.
By using a low or zero-tax state company as a supplier or vendor to your practice, for example, you can shift otherwise highly taxable income from your practice to an entity in a zero-tax state. It may also be possible to shift income from one tax year to another.

Another area of legal vulnerability that’s expanded rapidly in recent years involves employees suing employers for wrongful termination, sexual harassment (by you or by someone else in your employ) or any form of discrimination (such as failure to hire because of age).

How serious is the risk? According to a recent study, in California alone, the courts have been deluged with more than 100,000 of these lawsuits. In addition, employers who give a departing employee a bad reference are sometimes later sued for defamation. According to Walter K. Olson, author of The Litigation Explosion:

• In the three categories mentioned above, employer-defendants lost 78% of the time in cases that were
• decided by a jury.
• The average award in a wrongful dismissal case was $646,000.
• The average award in a discrimination case was $722,000.

One of the best defenses against this type of litigation is in the use of a so-called "professional employer organization" (PEO), sometimes referred to as "employee leasing." A PEO serves as an off-site, full-service human resources department. They assume all liability and responsibility for the functions of hiring, firing, payroll, tax deposits, quarterly filings, compliance, worker’s compensation, benefits and so forth. More important, they stand between you and your employee in the event of litigation. Other advantages include:

• They use their own federal ID numbers and take full responsibility for tax payments and tax-related problems.
• They’re responsible for late deposits and any compliance issues that may arise.
• They offer a comprehensive benefits package that a small business could never duplicate at a reasonable cost.

There are also potential tax benefits. One of the best opportunities for this lies in participating in a PEO outside the United States. These generally allow you to defer part of your annual income into a fund that grows tax-free during its accumulation phase – and the deferred funds are completely shielded from lawsuits, garnishments, etc.

These tax-deferred plans are available only through international employee-leasing firms, principally in Ireland, because of Ireland’s advantageous tax-treaty relationship with the U.S. Structured properly, they’re fully tax deductible for the business and they comply with U.S. tax law. Also, unlike other "qualified" plans, such as IRAs and 401ks, these tax-deferred plans are discriminatory. That means you don’t have to allow all of your employees to participate.

In our opinion, because of the liability protection and the potential income tax savings of PEOs, virtually every physician should consider making them a part of their basic plans.

Used in conjunction with other business, financial and tax strategies, the asset protection possibilities described in this article can form the basis of a highly effective and well-integrated asset protection plan. Nevertheless, these are merely "the tip of the iceberg."

For more information, contact Michael Potter, Esq. at (619) 755-6672 or Stan Joseph at (800) 493-4490.

Real estate privacy trusts (also referred to as "land trusts") are privacy-enhancing, title-holding vehicles. Legal and equitable interests in real estate, such as apartment buildings or commercial properties, are held in the name of one person (the "trustee"), but you ("the beneficiary") hold all the beneficial ownership. Tax benefits such as income and depreciation, for example, would pass through to you. Under the terms of the trust, the trustee can only perform certain acts, such as the signing of deeds, and can only act when given direction to do so by the beneficiary.

While this type of trust doesn’t enjoy the same impenetrability that an asset protection trust might offer, it does serve a purpose in enhancing a family’s financial privacy. It keeps your name off of the public listing of the property’s ownership and thus gives you a "lower profile" as a potential lawsuit target.