Asset Protection:
By Jonathan Reed and Douglas Reed
Everyone wants to protect their assets from possible future creditors. What's the point of working to build up savings if you could lose it all in a lawsuit?
At Reed & Mansfield, we take a two-step common sense approach.
First Line of Defense: Good Insurance:
The best thing you can do is make a lawsuit against you someone else's problem: your insurance company's problem, not yours.
Insurance will not cover every claim against you. Specifically, it almost always excludes intentional bad acts. With respect to auto collisions it always excludes any extra damages allowed for drunk driving and in a minority of cases may even exclude any coverage if drunk driving is involved.
But, the right insurance will protect you from most claims not involving deliberate bad behavior. (The decision to drive and drink is considered an intentional bad act.)
A best general rule is to have insurance coverage limits substantially larger than your assets. We will explain below why this almost always works. But, even lower limits of liability insurance often ultimately protect you in a lawsuit. For now, let's look at what insurance you can get.
Most people, of course, have a home owner's policy and auto coverage. Usually the home owner's policy protects you against lawsuits for negligence not involving commercial activities. Thus, for example, it might protect you if you ski into another skiier and injure him and he sues you because at the time of the collision, while you were skiing downhill you were yakking on your cell phone instead of watching where you were going. It would almost certainly cover you if you invited a guest over who slipped on marbles your young son left on the floor. Exactly what is covered depends on the particular policy.
But often the home owner's policy has a liability of $100,000 and the minimum auto coverage required in Nevada is only $15,000/$30,000 which is a limit of $15,000 for injury to any one person and a limit of $30,000 for injury in one accident.
You should have an umbrella policy. Typically, the umbrella policy extend coverage on the home owner's policy and the auto coverage to a million dollars or some multiple of a million dollars. The umbrella policy requires certain larger limits on the home owner's and auto policies. If you own a boat, the umbrella policy can cover the boat as well.
If you own rental property the umbrella policy, for an extra premium, may cover lawsuits against you for negligence arising out of the rental property depending on how much rental property you have. If you have a lot of rental property you may need to buy a commercial policy.
Why "Inadequate Insurance" Often Gives Complete Protection:
Suppose you have a $1,000,000 insurance policy and you are liable to a catastrophically injured Plaintiff. Let's say the Plaintiff's attorney figures the case has a value of $1,500,000 to $2,000,000. Your insurance company hires an attorney who also figues the case is easily worth the $1,000,000 insurance limit. At this point your insurance company offers the $1,000,000 to the Plaintiff and their attorney in exchange for a complete release of liability. Here's the choice facing the Plaintiff and their attorney:
1) Agree to take the $1,000,000 and within a couple of weeks (or a few if the insurance company delays) get a big payday, or
2) Litigate in the hopes of getting a large judgment and then hope that they will actually be able to collect from you after they get a large judgment. Until they get the larger judgment you will legally be able to spend whatever money you have. If the Plaintiff gets a judgment in excess of the $1,000,000 policy limit, the Plaintiff could possibly (with a lot of legal hassle) undo transfers of money you made in anticipation of the large judgment. But if you spent the money on a round the world trip, there is the nothing the Plaintiff can do about that.
Our firm does a lot of personal injury work. In a situation such as the above it would be very rare for a client not to take the substantial bird in the hand.
Second Line of Defense: Legal Fences
Legal fences make it hard or impossible for a claimant to get your assets.
The Nevada Homestead Exemption:
One very strong legal fence that is virtually free is Nevada's homestead exemption. This exempts $550,000 in equity in your Nevada residence assuming that you are a Nevada resident. Therefore, one asset protection plan is to pay down your mortgage if your equity is less than $550,000. We say that this is a very strong legal fence because there is a strong policy is generally not allowing creditors to chase people out of their homes. However, there are exceptions. A brief (not complete) list of exceptions are: 1) tax or HOA liens on the property, 2) claims from your lender that relate to their loan on the property, and 3) possibly certain transfers of money into your homestead to avoid a specific debt. However, if the money is already in your homestead, you can record a homestead exemption even right after a creditor gets a judgment against you. Homestead exemption forms are available on the web and the filing fee is usually only $15.
Retirement Accounts:
A second strong legal fence is a tax sheltered retirement account such as a regular IRA, Roth IRA, 401K or other pension plan. Again, there is a strong public policy that creditors shouldn't take away peoples' retirement savings.
Limited Liability Corporations (LLC) and Other Corporations:
Limited Liability Corporations or other corporations are advisable for many business activities. We refer our clients to:
Jacqueline Ackerman, Esq.,
Law Offices of Jacqueline S. Ackerman LLC
2620 Regatta Drive, Suite 102
Las Vegas, NV 89128
phone: 702-304-2411
for advice on all real estate and business matters, including the formation of LLC's, series LLC's and other corporations.
Using Trusts to Protect Assets:
NRS Chapter 166, http://www.leg.state.nv.us/NRs/NRS-166.html ,allows the creation of Spendthrift Trusts. The idea of a spendthrift trust is that money is set aside for a beneficiary that cannot be attacked by creditors. As a practical matter, the statute provides a fairly workable arrangement if the beneficiary is NOT the person funding the trust. In simple language, if Dad wants to leave money to his adult son, but wants to keep that money safe from his son's present or future creditors, the Nevada legislature is okay with that because Dad doesn't usually have a duty to pay his adult son's creditors. But, if Dad wants to protect his own money from people or businesses he owes legitimate debts to, the Nevada legislature approaches that situation with great caution. As attorneys we don't feel that NRS Chapter 166 provides a way to avoid one's own debts that is attractive to most people and therefore limit our Spendthrift Trusts to situations in which the person funding the trust is not trying to avoid their own creditors.
(However, you will find other reputable lawyers who will advise you that an NRS Chapter 166 Spendthrift Trust can be set up to protect your own assets provided that you are not the trustee and provided that the trustee has discretion with regards to distributing funds to you and provided that the trust is not set up to avoid existing liabilities. However, these other reputable attorneys will then caution that while this scheme should work, there is still some uncertainty as to whether other states will honor this Nevada law and that this Nevada law is relatively new and hasn't been that well tested in a lot of court cases. In other words, these attorneys suggest an NRS Chapter 166 Spendthrift Trust as a possible protective device that for high net worth individuals is worth the fees and inconvenience because it will probably work.)
(The History behind NRS Chapter 166 Spendthrift Trusts is that some of the very rich have traditionally used "offshore trusts" in small countries to stash their assets. These countries, seeking trust business, make it very hard for creditors to execute on trust assets in their countries. Unfortunately, such offshore trusts are very expensive. Nevada decided to try and get into this business for the benefit of its legal and financial communities. However, because Nevada is part of the U.S., assets in Nevada are simply not as isolated from the American legal system as assets in a foreign country.)
If you want to set up a Spendthrift Trust to protect your own assets we will be glad to refer you an attorney we respect who offers this service.
Don't think for a minute that there is a trust you can set up to legally avoid paying what you owe the Internal Revenue Service (IRS).
We think that people who want to protect their own assets should explore buying adequate liability insurance, and setting up various business forms such as limited liability corporations, series limited liability corporations, other corporations, and limited partnerships.
In a nutshell, NRS Chapter 166 allows a person to set up a Spendthrift Trust for the benefit of a beneficiary, including himself, protecting the assets from the beneficiary's present and future creditors. BUT, the price that has to be paid is that the beneficiary loses control of the money in the trust and an independent trustee gives the money to the beneficiary according to certain guidelines.
The ideal trustee to hold and pass out the money out is a strong bank or trust company. This is because we expect the bank or trust company to outlive the beneficiary and because the bank or trust company can be sued if it doesn't do the job within legal requires. Unfortunately, such services are expensive and are impractical for smaller estates.
Trusted family members can serve as trustees and often will do so for little or no pay. The problem with family members is we don't know how long they will live or how long they will enjoy the good physical and mental health to serve.
Contact Information:
Reed & Mansfield
6655 W. Sahara Ave., Suite B-200
Las Vegas, NV 89146
phone: 702-343-0494
regular business hours: 9am-5pm (Pacific Coast time) M-F
most days: We will also take your call between
7am-9pm including weekends and holidays
Web Pages and Informational Text (c) Copywright 2010, Jonathan C. Reed