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The focus of this blog post is on some of the more important steps people can take to: a) mitigate their fear of lawsuits – an understandable fear in today’s litigious environment; and b) reduce exposure of their assets to judgments that could arise as a result of litigation. Of course, having a comprehensive and up-to-date estate plan is one of these components.
Within the last decade, studies have shown that the wealthiest American families are increasingly worried about being targets for big lawsuits. Even people of more moderate wealth often have fears about potential liability from being sued. Relevant statistics are not comforting either, reflecting that 15-20 million civil lawsuits are filed each year in the U.S. and that the annual cost of litigation to our society exceeds $200 billion.
Yet, many people commonly conduct their personal and financial affairs in a manner that leaves them unnecessarily vulnerable to the very litigation they fear. So, what are some of these common, dangerous actions and omissions?
Employing domestic help without proper insurance coverage.
Owning real estate investment property in one’s own name.
Owning a small business as a sole proprietorship.
Having insufficient scope and/or coverage limits of personal insurance (e.g. home, auto).
Having no estate planning documents, or poorly/incompletely drafted ones.
The “first line of defense” for most potential liabilities should be strong, comprehensive personal insurance. Many people, including knowledgeable professionals, are not well informed about detailed aspects of their P&C (property and casualty) insurance coverage. During our busy lives, insurance often gets the short shrift.
I encourage you to call your insurance agent and schedule a complete review of each insurance policy you own. In fact, such reviews should be done regularly. During such periodic reviews, you should identify coverage and explore what additional policies, endorsements or riders you may be advised to purchase.
If you employ domestic help, talk to your insurance agent about “employment practices liability” insurance. If you don’t have a personal umbrella insurance policy (which serves to increase the coverage limits of any applicable underlying policies), obtain a quote for one. Premiums are usually very affordable in view of the extra coverage provided. In general, obtain a broad scope of coverage to protect against all likely risks. Of course, you should also manage your premiums, deductibles and limits to ensure optimal coverage at an affordable cost.
If you own real estate investment property in your own name, or a sole proprietorship business, you should seriously consider forming a business entity, such as a limited liability company (LLC). Properly forming and operating a business entity helps shelter your personal assets (e.g. home and bank/brokerage accounts) from potential liabilities arising out of owning, renting and/or managing a business or investment property.
Exposure to potential liability from your sole proprietorship or investment property may seem extraordinarily remote. But, rather than relying on statistical improbability (e.g. how relatively unlikely it is that you will be sued and found liable in connection with your business or investment property), you should focus on the potentially devastating financial consequences if such unlikely scenario were to occur. The “bottom line” is that business entities are typically a very attractive and affordable means of providing a great deal of extra protection in our litigious environment.
Having no estate planning documents or documents that are poorly or incompletely drafted can also cost you or your family in countless ways. Besides having the basic documents in place (Trust, Will, Power of Attorney, Advance Health Care Directive), make sure that you have obtained recent legal advice about these important concerns: i) is your Trust optimally structured in view of major new Federal Estate Tax law enacted in 2013? ii) do your Health Care Directives contain HIPAA release provisions? iii) is your Trust properly funded (are substantially all of your assets in the trust)? iv) is your real estate properly titled? v) do your Will and Trust have adequate provisions to protect your minor or young adult children? vi) do you have beneficiary designations on file for your life insurance and retirement plans that are consistent with your current wishes and tax efficient? vii) do your documents designate appropriate trustees, executors and agents, in whom you have confidence to carry out your wishes reasonably and without damaging and avoidable family conflict?
A wise man (many believe it was Thomas Jefferson) once said “the price of freedom is eternal vigilance”. The more vigilant you are in taking reasonable steps to protect yourself and your loved ones, the better off you and they will likely be.
Besides being financially prudent, this vigilance just might help you sleep like a baby…
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.