Insurance Should Be Part of Your Asset Protection Plan

Articles that seemingly have nothing to do with asset protection might still provide valuable asset protection reminders.  A recent article by Teresa Dixon Murray in the Cleveland Plain Dealer is a good example.  The article discusses an individual who keeps more than $100,000 hidden at home! 

That reminds me of at least two asset protection considerations.  First of all, hiding assets is rarely an effective asset protection plan.  You could hide cash at home, but homeowners insurance generally covers only about $200 in cash in the event of a fire or robbery.  So while hiding cash may seem like a good idea, it probably is not for many reasons -- including the fact that is uninsured.

The article also reminds me that most of us rarely conduct a periodic view of all of our life, auto, casualty and other insurance policies.  That periodic review could be worthwhile because it may identify significant assets that are not properly insured.

There are many asset protection strategies that are worth considering.  Some of them can be fairly complex.  An offshore trust arrangement, domestic asset protection trust or one or more LLCs could be a reasonable choice for certain individuals in certain circumstances.  But as I have mentioned many times before, you should not overlook the most basic forms of asset protection.  And one of those items is insurance.  It is a very worthwhile exercise to periodically review your biggest risks and ask whether they are (or could be) insured.

Teenage Driver Means Lots of Potential Liability for Parent

I am constantly focused on asset protection - - even on vacation!  A week or so ago while on vacation in Hilton Head, SC, I noticed a local newspaper article that reminded me of the huge potential liability you can face from a teenage driver in the family. 

An article in The Island Packet described a new lawsuit stemming from a 2011 fatal automobile accident on Hilton Head.  A teenage girl (Kendall Walton) was driving the car and died in the accident.  Another teenage passenger (who was injured) is now suing the driver’s father - -essentially alleging that the parent is financially responsible for his daughter’s negligence. 

I know nothing else about the lawsuit, and it may or may not be justified.  But the article is a stark reminder that you have huge potential liability for your teenage driver.  And damages from one of their accidents could be catastrophic.  Sufficient insurance (including an umbrella policy) is critical.  Having an overall plan in place to properly shield your assets from creditors is also important. 

Even on vacation, there was no escaping the reminders that catastrophic lawsuits can strike at any time.  Asset protection is critical before such an event occurs. 


Insurance Should Be Key Component of an Asset Protection Plan

"Asset Protection" is not a substitute for insurance. In fact, insurance should be an integral part of protecting your assets.

There are many kinds of insurance. Each risk has to be evaluated on its own and a reasonable decision has to be made about the amount of appropriate insurance. For example, if you have teenage drivers in the family who are using your car, I would strongly recommend increasing your liability limits and making sure you have an umbrella policy.

Even when you have a lot of insurance, it is not necessarily a substitute for additional asset protection planning. Events can occur for which there is no insurance coverage. And damages could exceed policy limits.

All of this means that insurance coverage and other asset protection techniques go hand in hand. One is not necessarily a substitute for the other.


Umbrella Policy

A so-called umbrella policy can provide substantial insurance coverage at a modest cost.

There are many reasons you need to protect your assets.  We often focus on business and professional risks, economic problems, divorce and other catastrophic events.  But disaster frequently strikes from much more routine events -- like an auto accident.

Let's say you accidentally injure one or more people in an auto accident.  You have $300,000 in liability insurance coverage.  But the medical bills of the injured parties are closer to $1 million.  It is quite possible that you could eventually lose your house or other assets in such a situation.

An umbrella policy provides excess insurance over your auto and home owners policies.   Generally, claims settle at lower amounts.  So the additional protection does not cost as much as the first level protection.  Also, an umbrella policy covers multiple risks (such as auto accidents and accidents in your home).

I advise clients with respect to some rather sophisticated asset protection techniques.  But you should not overlook the basic protections provided by some very simple, reasonable and relatively inexpensive alternatives -- like an umbrella insurance policy.

Review Your Current Insurance Coverage

Asset protection attorneys assist clients with domestic and offshore trusts, limited liability companies, and a variety of other asset protection alternatives.

I have recently reminded a number of clients, however, that they should not overlook one of the simplest and most effective asset protection strategies -- insurance.

When was the last time you reviewed all of your insurance policies?  While you may have health, life, homeowners, auto, professional malpractice and other insurance, have you recently analyzed whether your coverage is adequate?  Things change very quickly these days, and the amount of insurance you had five years ago may no longer be adequate.

I realize that insurance costs money, so there is always the issue of how much is too much.  But for anyone with significant net worth, it is highly advisable to err on the side of having a bit a more insurance than less.

An umbrella policy is a great way to get extra liability insurance coverage for a relatively low cost.  This type of policy provides excess coverage for your auto, home and possibly other insurance policies.

Insurance does not cover all risks.  So a thorough asset protection review certainly does not end with your insurance coverage.  On the other hand, insurance should certainly not be overlooked; and it can be a very important part of an asset protection plan.


Single Premium Whole Life Insurance Policy Can Provide Asset Protection

Certain life insurance products (as well as certain arrangements like an irrevocable life insurance trust) can provide asset protection advantages.  For example, if you have a significant amount of cash that is not otherwise needed, and you also have the need for life insurance, a single premium whole life policy might be appropriate.  Cash that is simply sitting in a bank or money market account is not well protected from creditors.  A life insurance policy is going to have far greater protection.

I am certainly not recommending the purchase of any life insurance products without careful thought.  But life insurance can play a meaningful role in estate planning and asset protection planning.

In many jurisdictions (including Ohio), the cash value of life insurance is generally well protected from creditors.  The protection is not as high as that offered by a qualified retirement plan; but it is still very good.  And it is vastly better than assets held in a personal bank or brokerage account.

Asset Protection Strategies for Your Business

There are a number of relatively simple strategies an organization can use to provide significant protection for its assets.

1.                        Separate Entities. Consider creating a separate entity (possibly a limited liability company) to hold real estate, machinery, or assets relating to a new line of business. If there were a future judgment against the corporation, the assets held in the separate entity or entities would likely not be subject to that judgment as long as appropriate formalities were followed. Tax issues can arise in connection with the transfer of assets, and these should be considered prior to any transfers. For example, the transfer of real estate out of a C corporation into a limited liability company could trigger a significant amount of tax, and thus make the transfer impractical. But if additional real estate or a significant piece of machinery or equipment is being acquired, having a new limited liability company purchase it (and then lease it to the corporation) could have significant advantages. 

2.                        Limited Liability Companies. A limited liability company (“LLC”) is a hybrid type of legal entity that has some characteristics of a corporation and some characteristics of a partnership. 

  • Owners of an LLC are called members;
  • They can elect to receive pass through tax treatment like a partnership or an S corporation, or to have the LLC taxed like a C corporation;
  • They have limited liability like in a corporation; 
  • They have a great deal of flexibility in management structure. 

LLCs can provide significant asset protection advantages. A creditor of an owner of a corporation (that is, a creditor of a stockholder) often can gain control of a corporation by getting control of the owner’s stock. Creditors will have a much more difficult time gaining control of an LLC. Thus, many business owners now prefer to form an LLC instead of a corporation when the need for an additional entity arises.

3.                        Insurance. Review all of your business insurance with both your attorney and your insurance agent. Since your attorney is not selling any insurance products, he or she can often provide an objective review of the types and amount of your business insurance. Having adequate insurance is one of the most important (and generally one of the most cost effective) ways to provide protection for your business.

4.                        Update Corporate Records and Follow Required Formalities. Many closely held businesses do not keep their corporate record books up to date. In the event of a lawsuit against the company, a plaintiff’s attorney can attempt to “pierce to corporate veil”. This means the corporation will essentially be ignored and the owners (shareholders) will be personally liable for the corporate debts.  Following basic corporate formalities, including

  • Holding an annual shareholders meeting;
  • Holding regular meetings of the Board of Directors;
  • Avoiding any mixing of personal and corporate assets; and
  • Keeping corporate records up to date.

will all help to insure that the assets of the owner(s) of the business are insulated from any judgment against the business. One of the many advantages of an LLC over a corporation is that LLCs require fewer formalities in both their organization and operation. However, piercing of the LLC veil is also possible under various circumstances, including inadequate capitalization or failure to maintain a separate indentity (for example, failing to have a separate bank account for the LLC). 

5.                        Business Succession Plan. Many business owners lose sleep worrying about lawsuits and other potential legal claims. While these concerns are often justified, more businesses collapse from lack of a business succession plan than from a lawsuit bought by a party unrelated to the business. Lack of such a plan can lead to fights among family members, including litigation, which can be disastrous at both a business and a personal level. Paying attention in advance to at least some form of succession plan can save an enormous amount of trouble later. Life insurance should be considered as one part of the business succession arrangement. Good business succession planning is also a form of asset protection planning. 

6.                        General Legal Review of Business Operations. Is your business in compliance with applicable employment laws and other regulatory requirements? Has your employee manual been reviewed recently? One lawsuit will likely cost far more than a basic legal compliance review. A legal “check up” is like a medical check up: identifying one or more serious problems and taking care of them now can avoid a much greater problem later.