Asset Insulation For Everyone 2009

[Martin Hash]

This article describes a method of protecting the equity you have built up in your home, stocks, or business from tort judgment damage awards.

Have you noticed that the only people held responsible for their actions in the United States are responsible people? You know what I mean: if you have spent a lifetime building up a retirement nest-egg, living frugally and conservatively, reigning in your temptations, postponing your own gratification, building equity into your life - being RESPONSIBLE - you could lose it all in a Personal Injury lawsuit! It should irritate you no end that an irresponsible person – a person who has consumed all that they’re given and accumulated nothing – that person is “judgment proof,” and no plaintiff’s contingency lawyer will pursue a case against them because they can’t get blood from a turnip. It is only you who is held responsible – what kind of justice is that!?

Even if you have “liability” insurance, that only attracts the kinds of lawsuits you would rather avoid altogether, and your coverage probably would not be enough anyway. The lawyer that is attacking you wants all your assets – you are a big payday to them: jackpot justice. Use the money you are paying for liability insurance for better legal coverage – and keep the difference!

So, if you are a responsible person, take your assets to the next level by responsibly INSULATING them. It’s a matter of ethics and morality – otherwise, you will be at the mercy of unscrupulous people with suspect motivations. You are the one who has shown the good judgment – make yourself the arbitrator of the situation.

Attorneys are often apologists for the liability crisis in the United States. We cannot have a reasonable discussion about whether liability needs revision without being shouted down by personal injury lawyers and people who feel damage awards are a perfectly honest method of wealth transfer. For these reasons, it seems highly improbably that Personal Injury attorneys and their sympathizers would ever allow the demise of “jackpot” litigation, where any fender-bender could win them the lottery. Therefore, we are simply going to have to make protecting your assets a reality regardless of people’s opinions – the French call it a “fait accompli.”

Anybody who has equity to lose is intelligent enough to understand the strategy you will be using. Most Personal Injury attorneys work on contingency, which means they do not get paid unless the defendant (you) have something to lose, so they will be looking for something to take before they start a lawsuit against you. Real estate is the easiest to track down, and it usually has a lot of equity tied up in it, so that is where those attorneys are going to first. Plus, real estate can often be the source of the lawsuit – the plaintiff may be claiming they hurt their back slipping on the sidewalk in front of your business. If the real estate is in your name, it is even worse because that will put all of your assets at risk. Here are the steps you can take to protect you and your loved ones from legal blackmail:

1) Separate yourself from tort-risky assets like real estate and businesses by putting them into Limited Liability Companies (LLC); one for each asset you own. Not only are you personally protected from torts resulting from that property, but all of your other assets are protected too. (It is important that all of your LLCs have only a single member so that the IRS will ignore them as an entity so that you will not be subject to double taxation or lose tax incentives for individuals, such as the tax deduction for the interest you pay for your home.) Plus, there is a level of opacity between you and your asset – which means the predatory lawyer would have to dig deeper to find out the asset belongs to you. No assets – no wolfs at the door.

2) Strip the equity from the asset via a “friendly” lien. That way even if your adversary is aware of the property you own, when they perform a perfunctory title search, the liens will appear to consume any equity you may have in the property. As in step 1 above, this will discourage a contingency lawyer. Liens on property are called “mortgages,” and your equity-stripping lien will be treated just the same – you will have a 2nd (or 3rd) mortgage that equals the equity. This equity-stripping mortgage can be increased as the amount of equity in your property increases.

3) In the highly unlikely situation that a persistent attorney wins a judgment against you, you can honestly claim at the asset discovery hearing to have no net worth since all your assets are fully leveraged. At this level, you will need the complicity of a third party, such as an attorney, accountant, or trusted friend, because the equity-stripping lien cannot be held by yourself, or even a company owned solely by you, and the lien must be exchanged “for value,” which means that you must have exchanged something of value with the lien holder in exchange for the lien. The valuable thing you transfer will need to hold up under scrutiny by the court, so “ten dollars plus other valuable consideration,” the usually friendly transfer verbage, will not be enough. This step of your strategy should never be reached because the opacity of the LLC and the friendly lien discourage litigation, so even if you do not use a third party or exchange for value, it is worth performing the first two steps.

4) Even in the rare circumstance where a court sympathetic to the plaintiff forces a sale of your property to satisfy the judgment, the friendly liens are superior, meaning they are paid first before any award recovery, and that money will go to the third party, often an offshore company responsible to your best interests and immune to the court’s jurisdiction. Also, the off-shore company is opaque as to ownership and control. (In the few precedence cases where defendant’s egregiously moved their assets to offshore jurisdictions, angering the court enough to impose a Contempt of Court ruling, none of the money was recovered and the court eventually released the defendants to enjoy their bounty. Of course, you never want it to go anywhere close to this far, but if you’re stubborn enough, and patient enough, and do not fold under pressure, you can prevent unscrupulous confiscation of your hard-earned life savings.)

The strategy I have outlined above has not been tested in court, and hopefully it never will be. The goal is to discourage contingency Personal Injury lawsuits from ever being filed. The same general technique can be used for all of your assets. You can implement all the steps yourself with a little research about how to set up an LLC and attach liens, or contact a sympathetic attorney.

Dr. Martin D. Hash, Esq. is a Washington State attorney and accountant. He can be contacted at martin@hash.com