LITIGATION BOOM

By Nathaniel E. Clement, J.D.

Did you see the Wall Street Journal article dated October 14, 2003, entitled Litigation Boom Spurs Efforts to Shield Assets?

In researching litigation I came across a 2002 article in Forbes magazine entitled Guilt By Association--You get into an auto accident...Who's liable? The article was about an 18 year old in Rhode Island talking on his cell phone who slammed into the rear of another car. The jury awarded a $28 million judgment against the teen's father and against the car's owner. It so happens a leasing company owned the car. Whether this had anything to do with the outsized judgment against the owner is not known.

Many people who own real estate in N.C. do not know about the relatively new lead paint disclosure rules that apply to properties built before 1978. These rules require landlords to disclose to tenants or buyers all known information about lead paint. The penalty for violating the rules is treble damages and civil penalties. What will the plaintiffs' lawyers make of this law? Time will only tell. Perhaps what is happening with "toxic mold" will guide us. The Raleigh News and Observer in May of 2002 had an article entitled Toxic Mold Lawsuits are Mushrooming. This article told about a jury judgment against a rental property owner in Texas for $32 million.

The April 17, 2003, Raleigh News and Observer ran an article entitled Teen Killed as SUV Hits Bus. This article was about Nellie Rose, age 66, who plowed into the rear of a stopped school bus. A 5 year old was killed. The State Trooper stated the cause was "Inattentiveness...Not paying attention." Neither speed nor alcohol played a role in the crash and there were no skid marks on the road. It is too early to know what lawsuits have been filed against Ms. Rose at this time. Is this something one can buy enough auto liability insurance to protect against? Would $300,000 of coverage be enough? Would $2 million be enough? Would it matter if Ms. Rose had a net worth of $1 million? More importantly, is what happened to Ms. Rose something that could happen to any of us?

The June 10th, 2003, issue of the Wall Street Journal ran an article entitled Taming Hospital Billing. The article discussed how long stays in the hospital are resulting in enormous costs; some people have enough insurance to cover a million dollar hospital bill and some don't. The article stated "...medical debt has emerged as the leading cause of personal bankruptcy." As with the Nellie Rose example, is a long, expensive stay in the hospital an event that could happen to any of us?

A Los Angeles Times article written in 1993 by Kathy Kristof is entitled Protecting Assets is Not Only for the Wealthy. She quotes a study that says that one in ten people will get sued in any one year and she states that this makes even low-risk middle income people nervous. She makes some good points that are not generally known to most people. She states, "While not all estate planning provides asset protection, all asset protection strategies provide estate planning benefits." Ms. Kristof points out two rules of thumb: (1) if you try to shield your assets after you have been sued or threatened with a lawsuit (or contemplating bankruptcy), it's too late -- it's a "fraudulent transfer" and will be undone. (2) But if you employ asset protection devices years before lawsuits or creditor problems are on the horizon and you can show legitimate estate planning concerns, your planning will be honored. Thus, the only time you can plan for asset protection is when you don't need it.

For some people asset protection is achieved by just giving assets away. Other people believe this violates the cardinal rule of estate planning: "take care of me (or us)."

The rest of this article will provide an overview of some asset protection planning we employ in this office that does not take assets, to any real extent, away from your use but provides excellent protection when and if a lawsuit arrives at your door.

In the last issue of Wealth Strategies newsletter I discussed the limited liability company (LLC) as one asset protection method. In July of 2002, the Wyoming legislature authorized the Wyoming Close LLC. After my review of the Wyoming law, I believe that Wyoming has the best law in the country for LLCs for asset protection and estate planning purposes. Bloomberg Wealth Manager Magazine in its June 2003 issue stated that Wyoming is the friendliest state in the US for wealthy people. Here are some reasons:

◘ No income tax

◘ No inheritance tax

◘ No gift tax

◘ No franchise tax

◘ No business or occupation tax

◘ Low property taxes.

In addition, the Wyoming Close LLC statute is among the most favorable for LLC planning in the country. It mandates that a charging order is the exclusive remedy by which a judgment creditor can enforce a judgment. Wyoming's "default restrictions" are very strict, which allows, I believe, the best discounts for estate tax purposes available. Also, Wyoming has a low-cost structure for setting up and administering LLCs. The initial filing fee is $100. The annual fee is a maximum fee of $50 if all assets are located outside of Wyoming (which is generally the case). NOTE: For more information on LLCs, see my special article in the "Articles" link entitled "The LIMITED LIABILITY COMPANY: The Ultimate Estate Planning Tool."

Another planning technique that we recommend for married couples is the SWAAP Trust.™ A SWAAP Trust™ is a trust that a husband establishes for his wife and a wife establishes for her husband. The two trusts are spousal wealth and asset protection trusts. The SWAAP Trust works this way: H establishes an irrevocable trust for the benefit of W. H contributes annually $5,000 to as much as $366,000 to the trust. W also establishes an irrevocable trust for the benefit of H. W contributes annually at least $5,000 but as much as $366,000 to the trust. Now both spouses are in approximately the same position as they were before the gifts to the trust were made except for one important fact: the assets in the trust are asset protected. Each spouse will generally want to be the trustee of her or his trust. Each spouse will have the use of the money in the trust for "health care, maintenance and support." Furthermore, the assets in the trust are removed from the estate taxation system, and can now be transferred to children tax-free. The trust assets can even be transferred to successive generations free of estate taxes. And, as long as the money stays in trust, the money is

◘ Creditor proof

◘ Divorce proof

◘ Free from the claims of catastrophic health care expenses

◘ Predator proof

◘ Estate and inheritance tax proof.

My final easy-to-accomplish asset protection advice is to never give money to anyone you love. This sounds harsh, but, if you do, your loved one could lose it in a divorce or a creditor action. The good news is you can accomplish your intent another way that does protect the property from the bad things in life that attack family wealth.

If you love your family, give money to them in trust. A properly structured trust gives your loved ones the use of the money without the burdens and penalties of ownership.

Clients who want more information on asset protection planning may call to schedule a time to discuss if this planning is appropriate for you.

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1709 Legion Rd., Ste 214, Chapel Hill, NC 27517

Tele: 919-929-9298

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