By Scott Keffer
What does he want me to do, shout it out that I’ve been sued? Jack thought.
When Ted, the older of the two physicians, spotted Jack in their designated meeting spot, the hospital cafeteria, he knew something was definitely wrong. Through Ted’s mentoring of Jack, they had become good friends over the years. Ted had persevered with him, despite the fact that Jack wanted to do everything himself, and consequently got very little done in his personal life. Prior to last month, when they recommitted to meeting regularly, Jack had not seen Ted since he retired from practice over 18 months ago.
“Jack, you sick?” Ted bellowed from two tables away.
Why does he always have to make a big entrance, Jack thought. “No.” he whispered, barely mouthing the words.
“What did you say?” Ted shouted again.
“Come here.” Jack muttered, hoping that his tone of voice and facial expressions would communicate what he didn’t want to say. “All my life, all I wanted was to be excellent at my profession. I felt that if I worked hard enough, I’d be able to reward myself and my family for the sacrifices. Now, somebody wants to stick their hands in my pocket! You know why—because my pockets are deeper than theirs. The courts in our country are now in the wealth redistribution business!”
There was a strange release as Jack shared his frustration with Ted. Jack had not been able to share this with anyone except Dottie, his wife of 31 years, since he was ambushed with the news almost two weeks prior.
“Jack,” Ted added calmly, “that’s the world that we live in—a world dominated by lawsuits. I just read the other day that there are 54,000 lawsuits filed every day in the United States and that 94 percent of the world’s lawsuits are filed here in the U.S. Japan has a little over 13,000 lawyers and the United States has over 880,000 lawyers—and we are the only country in the world which permits contingent fee litigation!”
Jack wondered out loud, “What kind of a society is this anyway? We just got insulted and threatened by Weaver in December, now this. Do you know that since January of last year, almost 1,000 doctors have either moved out of Pennsylvania or refused to perform high risk procedures? Nationally, nearly one out of every two doctors has been sued!”
“What am I going to do now?” Jack mumbled with his head in his hands.
“Nothing about the lawsuit. To try and move any assets after the fact is what they call fraudulent conveyance. It’s a no-no.” Ted continued, “I’ve always said, it’s not a matter of if—it’s only a matter of when. I read the other day about a drunk driver who was speeding, careened past a set of detour signs and crashed. He sued the engineering firm that designed the road, the contractor, four subcontractors and the state highway department which owned both sides of the road. Five years later, all of the defendants settled for $35,000. However, the engineering firm was swamped with over $200,000 in legal costs. You’ve only been talking about professional liability, Jack. You haven’t even mentioned personal liability. Besides my house, I own a piece of investment real estate and I’m on the board of the symphony. All of those create lawsuit risks as well.”
“Aren’t you worried?” Jack said as he popped his head up.
“Not really!” Ted seemed to boast, “Creating legal fences around my assets was one of the objectives when I put together my wealth preservation plan.”
Not another lecture on the need to plan, Jack thought. “I’m gathering information right now as quickly as I can!” Jack said, hoping to change the direction of the conversation.
Ted jumped in, “I can’t believe you. I’ve been telling you for years to stop trying to do it yourself—and I emphasize trying, since you haven’t put much in place. What would you say to a patient who said they were gathering information on performing their own surgery? You’ve told me before that people like that are foolish—what they need to do is to find a trusted specialist. Which reminds me—last month you were supposed to contact my specialist. Well, did you?” Ted interrogated.
I might as well just sit back and listen, here comes the lesson, Jack thought.
Ted didn’t even wait for the answer. “I figured as much. Well, let me share what I think I know. I used to think that a corporation and jointly-held assets were enough to protect my personal wealth. I saw a Cornell Law Review article that said that piercing through corporate asset protection is the most highly litigated arena today. Apparently, the courts have used 80 different ways to erase corporate protection. The article went on to say that over one half of the corporations attacked have been successfully pierced!”
“Wow—more good news.” Jack exclaimed with increasing frustration.
Ted moved on, “And jointly-held assets are no panacea. What happens in the event of divorce? No protection! From an estate planning perspective, our joint assets would have cost us hundreds of thousands of dollars in unnecessary estate taxes! Let’s get out of here and place a call to my wealth preservation specialist.”
“Remember, I’m only gathering information.” Jack conceded…
Later, on the phone, Ted’s specialist began, “First of all, Jack, asset protection is only one goal and must not be addressed in a vacuum—it must be integrated with your other goals. Every strategy has side effects, so you want to be sure there is coordination. You don’t want to solve a problem and create a new one. Not any different from concerns you have about the side effects of a combination of prescriptions. Let me start with the goal of asset protection—it is to level the playing field between the plaintiff and the defendant—that is, to create leverage by enhancing your bargaining position. Success can be either an early, inexpensive settlement or no litigation at all.”
The specialist continued, “Some of the tools include joint ownership, exempt property, insurance, family limited partnerships, domestic trusts, charitable trusts, retirement plans and foreign integrated trusts.
Be cautious about the so-called benefits of domestic self-settled trusts, where the person establishing the trust is also a beneficiary of the trust. The strongest protection exists in Alaska, Delaware, Nevada, and Rhode Island. However, the effectiveness of these trusts is questionable. The most powerful argument is that one state is obligated under the Full Faith and Credit clause of the United States Constitution to enforce the judgment of a creditor obtained in another state.”
“I’ve read a lot about family limited partnerships lately, what’s your opinion?” Jack prodded.
“That’s a little like saying, ‘I’ve read a lot about laser surgery, what’s your opinion?’”the specialist answered. “It depends, right? Tools like FLPs should never come before strategy—and come from understanding you, your circumstance and what you want to accomplish. That said, family limited partnerships (FLPs) have many benefits and should be considered in any wealth preservation plan. In plain English, a judgment creditor can only receive what is called a charging order and cannot execute directly upon assets within the FLP. That means they can only sit in the seat of a limited partner, as an assignee, not as a limited partner. In other words, the creditor gets only what the general partner decides to distribute—which would be nothing, except a bill for the tax liability.”
Jack liked what he was hearing.
The specialist continued, “Not an attractive asset for creditors. However, in ten states, including Pennsylvania, the courts have allowed the judicial foreclosure sale of limited partnership interests—thus eroding the asset protection benefits of FLPs. Also, be careful not to mix liability generating assets in the same entity, like placing two pieces of commercial real estate in the same FLP.
By the way, FLPs are not appropriate for Subchapter S stock, annuities or personal residences. They are most effective when used in a multi-tiered approach to asset protection planning—like when they are used in concert with a foreign integrated trust. Another caution, though. The claim that foreign trusts can avoid income taxes is absolutely false. Stay clear of anyone that makes that claim. Hopefully, you can see that there is no one right way to protect your assets; however, there are many wrong ways. There are a number of technical issues that need to be considered; however, Jack, you just need to get started with an integrated plan.”
“So, what should I do next?” Jack interrupted.
“The Chinese have a saying,” the specialist answered, “The best time to plant a tree is 20 years ago. The second best time is today. So, when is the best time to protect your wealth from lawsuits? Today! Start by engaging a specialist, who will not only deal with your asset protection issues, but will also create an integrated wealth preservation plan that will not only solve your issues, but accomplish your goals as well. The question is not “What?”, but “When!”
Scott Keffer is president and founder of Wealth Transfer Solutions, Inc., a legacy planning company in Pittsburgh.