Monday, December 31, 2012

Will an Umbrella Protect You from a Lightning Strike?

We all have heard the overused phrase that “we live in a litigious society.”  For many of us, being a named defendant in a lawsuit can be compared to being stuck in a lightning storm with an umbrella – an unsettling proposition.  Even if a person believes that he or she is not at fault for another’s damages or injuries, that person is relying on what many believe is an imperfect justice system to find the truth. 
 
Some believe that his or her auto or homeowner’s insurance, professional liability insurance, or an umbrella insurance policy will satisfy any potential liability that could arise in his or her personal or professional life.  However, there are numerous judgments that have exceeded the coverage limits provided by an individual’s personal liability insurance.  Furthermore, it appears that the cost for professional liability insurance and umbrella insurance continually increases while such coverage is becoming more narrow and limited in its protection from the potential range of tort liability.  Typically, professional liability insurance and umbrella insurance does not cover claims arising out of employment related lawsuits, breach of contract claims, or claims arising out of a business endeavor.  If the court assesses punitive damages, those damages will not be paid by a person’s umbrella insurance.
 
Nevada has been nationally recognized as a leader in passing powerful asset protection laws.  A number of these laws provide automatic protection with little or no action required to be made on behalf of the individual.  Some of these statutorily protected assets include money, not exceeding $500,000 in present value, held in an IRA and all money, benefits, privileges or immunities accruing or in any manner growing out of any life insurance policy.  In addition, Nevada has a generous homestead exemption of $550,000.
 
Other favorable Nevada asset protection laws require a person to implement certain legal entities such as corporations, professional corporations (PC), and limited liability companies (LLC).  These legal entities provide a person with asset protection when properly structured and operated. For example, a physician might choose to operate his or her medical practice within a PC while owning rental property in an LLC.  The physician’s patient who successfully sues for a medical malpractice claim cannot look to the rental property as a means to satisfy his or her judgment.  Under Nevada law, a judgment creditor’s sole remedy with regards to a person owning a membership interest in a LLC is a charging order.  A charging order does not grant the judgment creditor the ability to force distributions or assume a voting interest in the LLC.  Rather, a judgment creditor is only afforded the actual distributions, if and when made, to the debtor member of the LLC.
 
With its continued statutory improvement in each Nevada legislative session, the Nevada self-settled spendthrift trust, or more commonly known as the Nevada asset protection trust (NAPT), has become an increasingly popular tool in providing asset protection.  The NAPT is an irrevocable trust.  In basic terms, a trust is a legal relationship in which one person – the trustee – holds assets for the benefit of another – the beneficiary.  The person who creates the trust is known as the settlor.  Under Nevada law, a settlor is able to create a spendthrift trust which provides a way for the settlor to secure his or her property by shielding such property from potential creditors’ claims.  After a period of time (two years) after which an asset has been transferred to the NAPT, the property becomes exempt from creditor levy or attachment.  For example, a physician creates a NAPT in which he or she transfers a non-retirement brokerage account valued at more than $250,000.  More than two years elapses at which time the physician is involved in a multivehicle collision in which he or she is found to be at fault.  The damages awarded by the court exceed the coverage limits of both his or her auto insurance and umbrella insurance policies.  The $250,000 brokerage account is not available for use in satisfying the court awarded damages due to the fact they are held in the NAPT.
 
While we firmly advocate that all individuals and businesses should carry adequate insurance, it is also reasonable and prudent to take advantage of Nevada laws that allow you to further protect your assets. It is always possible that you could face a judgment in excess of insurance limits – or face a judgment for something that is not covered by insurance.
 
Everyone should seek the advice of competent and experienced legal counsel to see if sophisticated asset protection planning is right for them.
 
 

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