Do It Yourself Asset Insulation 2009

[Martin Hash]

Successful people need to be as conscientious about protecting their assets as they were in accumulating them because unscrupulous plaintiffs are simply waiting for their opportunity to sue for their financial gain. And depending on the contributory negligence rules of a tort judgment in your state, you may be financially liable for the entirety of a damage award regardless of your level of responsibility in an accident! (The "deep pockets" rule.) Whatever your moral or ethical feelings may be, the unfairness of the tort system in the United States forces obligations on you that you had no opportunity to accept nor reject, which violates the conservative American ideal of contracts.

By understanding how you are targeted by the legal system, you can protect yourself from it. To start, almost all tort actions are taken on contingency by attorneys: that means the attorney does not get paid unless their client wins. Obviously, unless there is a good chance of economic gain, an attorney will not pursue a case, even if the negligence is egregious. Next, there is the misconception that more insurance helps you but “umbrella” policies that provide more coverage actually promote tort litigation because it makes the prize bigger. Actually, in the modern lawsuit culture, no insurance coverage would lower you risk of being sued. Lastly, you can provide the first three strategies of insulation against lawsuits yourself without an attorney’s help; these are: obscuring, encapsulation, and stripping. “Obscuring” means that you make it more difficult for attorneys to know your net worth by putting your assets under a different name. “Encapsulating” means limiting the exposure of a judgment award against you to only the property involved. “Stripping” means to remove any equity you have in your assets so that you do not have any “net worth” to take.

The first and second strategies are both accomplished by putting all of your separate assets into Limited Liability Companies (LLC). For example, if you own real property (a rental house), form an LLC and transfer title of the real property to the LLC. Transfer is accomplished with a simple document called a “Quit Claim Deed” that lists you as the transferor and the LLC as the transferee. Name the LLC something generic like “Lincoln St., LLC” if the house is on Lincoln Street. Thereafter, a simple title search will not have you listed by name as the owner. LLCs also have the important protection of keeping any liability involving that property from reaching you personally or any of your other assets: that is why LLCs are called “limited liability companies.”

Equity stripping is a little more difficult but could easily discourage almost all contingency suits in the bud because there seems to be no assets to seize, and because of the labyrinthine nature of equity stripping, ownership is difficult and time consuming to unravel. Basically, you do the same thing a lender does when they loan you money to buy a particular thing - they place a lien on it. Even without an attorney’s help you could create a “friendly” LLC that would then record a lien on your property, (if it is real property, such as your personal residence, the lien is called a “mortgage,”) then when a contingency-encouraged attorney is researching title on your property, and is subtracting the liens from the market price, there appears to be no equity, thereby discouraging any further pursuit of litigation. Be aware that as described above, should in the unlikely event an actual judgment be found against you, this incomplete method of equity stripping will not survive a court’s scrutiny during an asset discovery hearing. Legally recognizable equity stripping would require the expertise of a qualified attorney but, regardless, almost all contingency suits would not even begin if you simply did it yourself. If you have been responsible enough to accumulate a net worth then be responsible enough to protect it.

Dr. Martin D. Hash, Esq. is a practicing attorney and Certified Public Accountant in Washington State.