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Could You Lose All You Have In A Law Suit?
By Ray Chodos, Founder of the Wealth Preservation Group™
Wealthy families are vulnerable to losing much of their wealth as a result of legal action, accident, or catastrophic illness. The use of trusts, partnerships, and limited liability companies domiciled in favorable jurisdictions does keep litigants and creditors at bay.

Litigation lottery
Common sense dictates that a society’s legal system should discourage wrongdoing by imposing punishment and reparations on those so deserving. Our legal system has been manipulated and reconfigured to the point that only those that can pay are sued so as to produce financial rewards for claimants and their lawyers.

Affluent people are more likely to be linked by creative lawyers to being legally responsible for damages even if the correlation is quite indirect. If you sue enough affluent defendants, you will likely get a settlement or judgment in your favor eventually. Litigators scrutinize the respondent’s ability to pay before even the merits of the plaintiff’s complaint, lest they risk being uncompensated. The legal system to which we all are subject is not intuitive, and results in often unpredictable results having serious impact on affluent families under the noble mission of “righting a wrong.”

Divorce is an unfortunate eventuality of nearly half of American marriages. Rarely is such an event smooth, and ultimately result in settlements perceived to be fair by both parties. Business and professional relationship disputes have a similar perilous potential with each party positioning for advantage in the reconstituted remaining business. Civil tort litigation has facilitated involuntary transfers of over 235 billion US dollars of wealth in 2003 alone.

Sue over what?
When you consider how often we buy, sell, rent, employ, borrow, and disagree with others it is difficult to imagine not ever being named in a significant litigation claim. Many serious risks like divorce, business co-owner disputes, and employment wages are not insurable. For the events that are insurable (Car accidents), there are exclusions, exceptions, and monetary claim limitations on all policies. What is discrimination exactly, how about harassment? When is it wrong to discharge an employee and how should it be done?

If you are a professional, your malpractice or errors and omission coverages are limited. As an executive in a larger company, you can be personally responsible for the accuracy of corporate financial reporting (Sarbanes - Oxley). In the final analysis any unsatisfied claimant can theoretically engage the best lawyer on a fee contingency basis (no cost to plaintiff) to intimidate and litigate anyone with the means to pay by linking that party somehow to the damage causation. Many claims are settled without trial to avoid embarrassment, discomfort, and risk of verdict. Naturally, this practice encourages more litigation.

What can a reasonable person do to insulate against financial ruin?
We cannot predict all events that may cause someone to feel damaged by us in some theoretical legal way. We cannot prevent being named in a litigation “sweep” that covers anyone connected to the claimant’s event. We cannot make ourselves paupers in order to be in a position to not lose something of value. We can title our major assets in such a way as to become unattractive to litigate by removing the financial gain incentive. Titling of assets may incorporate legal entities that preclude attachment to underlying assets of the entity. All states offer Limited Liability Companies, Limited Partnerships, and various trusts, some jurisdictions are more favorable to asset owners than others in the United States. Offshore jurisdictions offer laws that are even more effective since they are immune from US judicial rulings. A series of legal obstacles and impediments discourage claimants and their legal representatives from suit and promotes negotiation by removing the financial gain incentive. A well-designed program retains all major assets and control locally while domiciling the legal entity that would need to be sued in a favorable jurisdiction.

To reduce attraction to “deep pockets” entities holding major assets need not identify the owner family name. Also, a revocable living trust in lieu of a will avoids public exposure available to anyone that wishes to read the document once probate is complete. Should outsiders be privy to who got what in your family? Revocable trusts do what a will does, and more in the event of incapacity without the public probate process. There are administrative and probate cost avoidances when revocable trust is used in place of a will.

Asset protection has become as common as estate planning for affluent clients aware of the perils. Wealth preservation planning can and should be incorporated into estate planning, business ownership succession, and financial planning efforts. The cost associated with quality planning as describes above is several days of the asset owner’s time devoted to learning so as to enable informed choices. The professional fees are $6,000 and up depending on complexity and degree of risk exposure. The cost is modest in relation to the legal and time cost of defense of even one event, even if you win. Aside from health, what is more important than protecting all we own?

Ray Chodos is a member of the Wealth Preservation Group, LLC, (WPG) of Greenwich, Conn., a firm that specializes in serving the asset-protection concerns of business owners and their advisors. www.WealthPreserve.com. Ray Chodos can be reached at raychodos@WealthPreserve.com.
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