Are Your Financial Assets at Risk?
It seems today that there is a law firm on every corner and at every social event you can’t reach out your arm in any direction without hitting an attorney.
I believe the only more prevalent professions seem to be financial advisors and real estate agents. I frequently joke that I can go to any event, throw my pen indiscriminately and hit another financial advisor. This may not be exactly factual, but it is probably not too far from the truth given the extended term of this current bull market!
How about you? Have you ever watched late night or free over the air waves digital television? If you have you have probably witnessed the continuous barrage of law firm commercials claiming they are serving your rights and can get you the “settlement you deserve.” If you had just landed here from another planet, you would assume that all earthlings do is sue each other!
Surprisingly, the National Center for State Courts (NCSC) analyzed civil lawsuit data for 26 states. The NCSC found that tort cases—those involving an injured party seeking damages from a negligent party—made up less than 3% of all civil cases in 13 of those states, 3-5% of civil cases in 8 states, and 5-8.2% of civil cases in 5 states. Moreover, product liability cases and medical malpractice claims made up less than 1% of civil cases. The majority of civil caseload is made up of contract and small claims cases. They also found that tort cases in the U.S. are on the decline. In 13 states, tort filings decreased by 25% from 1999 to 2008
Does this mean you can live recklessly, party like it’s 1999 and ignore the risk of lawsuits?
Obviously, the answer is “no”, especially if you are affluent!
There are still over 286,289 civil case filings every year in the U.S. according to 2019 U.S. District Court records and that number is growing at a 3% rate annually. That is a large number of civil lawsuits to be sure!
There is no statistic for this, but I would wager that most of such civil suits target the wealthy over the poor since they are the ones with the assets and deeper pockets.
So, what is the solution? Should you cower in fear in the corner? Move to the most isolated place on earth and hope no one finds you?
Obviously not! The answer is to arrange your affairs in such a way as to minimize your exposure.
We recently landed a new client who owned substantial real estate holdings. This client had no liability nor property insurance on any of their real estate holdings. These properties were owned by them individually and not in any entities.
I should also mention this couple had substantial other assets and made a significant income from their business interests. However, they had failed to stand back and see the impact of that income on their net worth and the amount of assets that were now at risk. It was no longer just a given property that would be at risk but potentially the entire portfolio, their income, and other assets.
In talking with them, we discussed the possibility of loss from fire or other hazards on their rental properties and they were very comfortable with such risk. However, when we reviewed their current structure, we determined that we could greatly reduce the risk of a frivolous lawsuit just by arrange the properties differently and looking at purchasing liability coverage on the portfolio of such holdings.
We are currently working with their legal counsel to put each property in a separate limited liability company (LLC) with 100% ownership by a holding company. We are also setting up a separate property management entity to oversee each property’s management, collections, and payment of expenses.
Yes, this structure will cost a few dollars to set up and it will increase their annual costs some, but it will also significantly reduce the chance that a frivolous lawsuit from one of their properties, tenants, or visitors to the properties, impacts their other business income or asset holdings.
By the way, this all came about because the underlying client asked if we could help them with the accounting for their real estate properties. When we first looked at the bigger picture, we noticed the larger risk and opportunity to help reduce this risk.
The question I then have for you is “how can we help you today?” We are not just an investment advisory firm, but a complete family office solution for affluent families! Maybe it would be worth exploring how we can simplify your life and allow you to pass more to your heirs, while minimizing the impact that creditors and your dear broke Uncle Sam has on your assets.
Why not connect with us today?