The specific structure of an asset protection plan must involve a consideration of the details particular to your situation. A plan that works well for one person may be completely wrong for another.
Your plan should be designed specifically to deal with the particular source of liability risk that you face. If you are like most physicians, protection from the financial threat of a malpractice lawsuit should be one element of your legal planning. If this is your primary concern, then your plan must effectively counter the legal tactics available to a plaintiff in a malpractice case. An asset protection plan should defend against the source of the most likely threats. For example, the plaintiff’s lawyer in a malpractice case is often focused on the settlement value rather than the trial outcome of his case. Taking a case to trial always involves significant financial risk to the plaintiff’s attorney due to the high upfront litigation costs and the uncertainty of the amount and timing of a damage award if a trial is necessary. Most cases settle before trial because the extreme unpredictability of the outcome makes the financial risk simply too great for both sides.
Based upon these economic realities, our primary goal in asset protection against malpractice liability is to enhance our bargaining power in any future settlement negotiations. If you have substantial and reachable assets, which are available to satisfy the excess uninsured liability, the plaintiff’s lawyer holds the negotiating leverage. When your personal assets are “in play” in a malpractice case and you face the threat of loss, the plaintiff’s bargaining position is very strong. When your assets are protected from a claim, the plaintiff effectively loses the “uncertainty” and risk-of-loss bargaining chip.
Underwater real estate
Another important concern these days is the lawsuit risk from a potential default on a mortgage loan. Except in limited situations (www.rjmintz.com/pdf/realestate.pdf), in the case of a mortgage default, a lender generally has the right to collect from the borrower the amount of any deficiency (the amount by which the loan exceeds the foreclosure sale proceeds). Even when the lender agrees to a short sale, we have seen lenders aggressively pursue collection for the unpaid loan balance from the borrower’s remaining assets. In contrast to the typical plaintiff in malpractice litigation, the banks in these cases rarely accept a negotiated settlement. Often the bank is merely the loan servicing agent (LSA) on behalf of the investors who purchased the original mortgage.
As such, it is entitled to add and collect servicing fees and litigation costs off the top of the defaulted property, even before the lender/investor gets paid. The economic incentive of the LSA is to drag these cases out for as long as possible while padding the servicing fees and costs.
Protecting valuable property
The litigation strategy for actually collecting the amount of any deficiency usually depends on how much the real lender (as opposed to the LSA) wants to spend on the litigation, based upon the anticipated recovery from the borrower’s personal assets. A deficiency judgment acts as a lien on all real property standing in the name of the borrower and when the property is sold or refinanced then the judgment lien gets paid off before the borrower receives any proceeds. This lien typically lasts for 20 years or so and the lender may just sit and wait or may actively pursue a foreclosure of the property affected by the lien. To defend against this common tactic of the lender, the appropriate asset protection strategy is to avoid the potential lien of a judgment from attaching to other valuable real estate owned by a borrower. This may be accomplished by holding and shielding these properties from judgment liens within entities such as trusts or LLCs, which can be effective when properly structured.
Remember: the planning strategies mentioned in this article should be discussed with your attorney who is familiar with your particular situation and understands the fraudulent transfer laws as they apply in your state.
Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners. To receive a complimentary copy of the book call 800-223-4291 or visit www.rjmintz.com.
The specific structure of an asset protection plan must involve a consideration of the details particular to your situation. A plan that works well for one person may be completely wrong for another. For example, the income tax and estate tax benefits of a plan must be efficiently tuned based on your age, income, accumulated wealth, and your family dynamics. The types of assets that you own can also make a big difference in the planning.