7 Legal Myths You and Your Advisors May Believe

By Dale West, Senior Advisor, American Society for Asset Protection

There are many financial and legal myths that circulate through society. A belief in these myths may result in serious problems. In a commencement address at Yale University, President John F. Kennedy taught, “The great enemy of the truth is very often not the lie—deliberate, contrived, and dishonest—but the myth—persistent, persuasive, and unrealistic.” Mark Twain echoed this thought when he said, “It isn’t what we don’t know that kills us, it’s everything we know that ain’t so.”

Myth 1: I Will Never Get Sued

If you own a business, you have exposure to many types of lawsuits even if you personally have done nothing wrong. For example, if someone injures themselves on your property (even if he/she were trespassing), you as the property owner would be liable for damages through what is called premise liability. Last year the average premise liability verdict was $2,001,754—and an award of $2.5 million or more was just as likely as an award of $50,000-$99,999.

Businesses also have exposure to employee liability. You could be sued for workplace accidents, negligent entrustment, wrongful termination, gender bias, racial bias, sexual orientation bias, religious bias, sexual harassment, and racial harassment. A lawsuit for any of these items could result in a multimillion dollar judgment. For example, one employee received an award of $86.7 million to compensate him for an accident at work that left him paralyzed (Miraglia v. H & L Holding Corp.).

Owning a business and not having protection against lawsuits, would be like living in an earthquake, hurricane, or flood zone and not purchasing the necessary insurance to protect your assets. Once the disaster hits, it is too late to buy insurance. Likewise, once a lawsuit hits, it is too late to set up the needed legal structures. You need to have them in place before the disaster hits. Once a lawsuit is filed against you, the transfer of assets to protective legal entities may be interpreted as “fraudulent conveyance” and can be unwound.

Therefore, it is essential to have the legal structures for lawsuit protection and prevention in place before you are sued. If you are not properly structured, it only takes one lawsuit to lose everything.

Myth 2: I Should Operate My Business as a Sole Proprietorship

Many attorneys and accountants recommend that their clients operate their business as a sole proprietorship because of the simplicity it presents when they file their tax returns. However, there are two major problems with operating as a sole proprietor. First, while a sole proprietorship allows a person to deduct most business expenses, there are tax deductions and reduction strategies that apply to S-Corps and C-Corps which cannot be used as a sole proprietor. The second major problem is that a sole proprietorship provides little protection against lawsuits. If your sole proprietorship is sued, all of your business and personal assets could be taken to satisfy the judgment. Even if you are sued personally as a result of a car accident or injury at your home, all of your business assets are at risk of being taken.

Myth 3: A Corporation Protects My Assets from Lawsuits

The corporation is a good management and tax reduction tool, but it is a poor lawsuit protection tool. If your corporation is sued, all of the assets (with equity) owned by your corporation can be taken to satisfy the judgment. The corporation does provide some protection of personal assets with what is called the “corporate veil.” The corporate veil is supposed to prevent a creditor from going after personal assets to satisfy a business debt. However, the corporate veil is often pierced, enabling your personal assets to be seized to satisfy a judgment against your business.

Myth 4: Asset Protection is Not Possible

We live in a very specialized world. For example, doctors specialize in a specific area of medicine (orthopedics, radiology, cardiology, etc.). There is no difference in the legal world. There are specialists for every part of our legal lives. There are attorneys who specialize in patents, family law, bankruptcy, personal injury, prosecution, estate planning, etc. Asset protection is a highly specialized area of law. A survey by the American Bar Association showed that less than one percent of attorneys claimed asset protection as their specialty. As a result, most attorneys and accountants are unfamiliar with the strategies and tools available to protect 100% of your business and personal assets from being seized in a lawsuit.

Myth 5: I Should Put My Assets in My Lower-Liability Spouse’s Name

One of the strategies recommended by less-than-experienced advisors, is to put assets in a lower-liability spouse’s name. This may provide a modest amount of protection in the event of a lawsuit, but there are four significant drawbacks to this strategy. First, it must be realized that courts carefully scrutinize conveyances between relatives and can invalidate the transfer of property regardless of when the conveyance took place. Second, your spouse may be declared an implied officer in your business and be named in a lawsuit. Third, your spouse could get sued personally. For example, if your spouse were involved in a car accident and someone was killed, a lawsuit would most likely follow; and every single asset in the spouse’s name would be at risk. Finally, having assets in your spouse’s name can cause serious problems in the event of a divorce.

Myth 6: I Only Need a Single Entity (LLC or Corporation)

Typically, a combination of entities will be the best course to take, rather than the use of one corporation or LLC. Most advisors are unaware of how to gain the best tax advantages and ensure 100% asset protection through the use of multiple entities. To ensure your assets are protected, you must separate your safe and risky assets into separate legal entities. The strategy of using multiple entities will minimize taxes and protect 100% of your assets.

Myth 7: Liability Insurance Will Protect Me Against Lawsuits

You may feel you are protected from lawsuits because you have liability insurance; however, insurance is like a hospital gown—you only think you are covered. Liability insurance does provide some protection against lawsuits, but it is limited in its coverage. Juries often will award judgments in excess of liability insurance coverage. Exclusions in your policy may also result in your insurance company denying coverage and leaving you liable. As judgments have increased over the years, some advisors simply tell professionals to get more liability insurance. This is problematic, as larger policies are costly and often serve as homing beacons for trial attorneys, who look for the deepest pockets in which to reach.

Conclusion

The authors of the book The Millionaire Next Door did an extensive study of millionaires to find the determining factors that resulted in a high net worth. The research concluded that hiring high-grade financial advisors was directly related to the propensity to accumulate wealth. An attorney who specializes in asset protection is one high-grade advisor business owners need. An asset protection attorney will ensure you avoid the myths in this article and will ensure your assets are properly structure for lawsuit protection, tax reduction, and estate planning.

For more information, please visit www.AmericanSocietyForAssetProtection.com or call 1-800-848-9238.

 

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