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Ep. 7: Basics of Asset Protection
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In this episode of Repair the Roof, Attorney Ted Gudorf discusses four basic yet essential steps to protecting your assets.
It is becoming increasingly popular for estate planning clients to want to protect their assets from potential creditor claims, whether from lawsuits or other creditor-type actions including bankruptcy and nursing homes.
How lawyers advertise today is drastically different from how they advertised half a century ago. In 1977, the United States Supreme Court determined that lawyers should have the right to advertise—commercial speech—by virtue of the First Amendment. Since that time, the number of lawsuits filed in this country has significantly increased.
All of this has led to the so-called “lawsuit crisis.” Asset protection has become a popular strategy as a result.
Listen in as Ted explains what “asset protection” is and what it is not, the importance of getting clear on what a debtor/creditor can and cannot do in your particular jurisdiction, and the four steps you need to take to protect your hard-earned nest egg not just for your family today but for the next generation.
Ted also offers advice on successfully utilizing an LLC for asset protection, and how to decide on a legacy trust, whether domestic or international.
- The origin of the so-called “lawsuit crisis” (0:54)
- Defining “asset protection” (5:22)
- Debtor/creditor law as a function of state law (8:00)
- Step #1: Understand your state law (12:20)
- Step #2: Understand your insurance policies (16:56)
- Step #3: Create a Limited Liability Company (LLC) (23:49)
- Step #4: Put your assets into a legacy trust (29:32)
- A recap of the four steps (38:52)
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Transcript: Prefer to Read — Click to Open
Hello everyone. My name is Attorney Ted Gudorf. Welcome to the repair the roof podcast. This name comes from President Kennedy’s famous quote, the time to repair the roof is when the sun is shining.
In this show, we help individuals and families learn more about all things estate planning and elder law. Welcome to today’s show. This is Episode Seven, asset protection basics. It has become increasingly popular for estate planning clients to want to protect their assets from potential creditor claims, whether that be from claims from lawsuits, or other creditor-type actions, including bankruptcy and nursing homes.
Prior to 1977, lawyers were not able to advertise like they do today. In 1977, the United States Supreme Court determined that lawyers should have the right to advertise by virtue of the First Amendment. They determined that there were first amendment rights to commercial speech that the State Bar Association or the state supreme courts could not prohibit. It seems ever since the mid-70s. We’ve had significant and substantial dollars spent on advertising, which has significantly increased the amount of lawsuits that are filed in this country. I recently heard of this statistic that said in the United States today, we have a lawsuit filed every four seconds. There are some who believe we have a lawsuit crisis on our hands since this lawsuit crisis emanates from the mid-70s.
Ever since then, we’ve seen other things besides lawyer advertising, a tribute to the number of lawsuits. There have been increasing theories of liability that have been developed by lawyers. In addition to that, the concept of strict liability, that is, holding somebody responsible for damages that occur, even if we can’t prove that they are at fault, or in other words, there’s no need to prove they’re at fault, we’re going to strictly hold them liable if we can prove the underlying facts. Some would say that we’ve had an increasing number of runaway juries. And some would say we’ve had judges who have been more sympathetic to plaintiffs’ lawyers. Certainly, the Advent and the allowance of contingency fees, where lawyers get paid a percentage of the verdict, has also energized a plaintiff’s bar to go after lawsuits, for instance, in the class action arena, where they can literally make millions of dollars.
So, since the 70s, we’ve not only seen an outbreak of advertising, it seems like they’re on TV every 15 minutes for now, seeing them on billboards, and the back of phone books. The other day I heard in Dayton. I even saw them with a sign on the side of our RTA buses in downtown Dayton. Prior to 1977, the primary focus for individuals to do any kind of asset protection was simply to form a corporation. A corporation would be formed for somebody who wanted to go into business. And the law said that if you formed a corporation and went into business, and you had something bad happened in the business. Either you had a bad credit situation or there was some sort of injury, they could not then sue the individual shareholders of the corporation and take their personal assets, like their home or their money. Instead, the lawsuit would be limited to the assets that were owned by the corporation. So, by and large, the primary focus of asset protection prior to 1977 focused on the formation of corporations for business owners, and not a whole lot else.
Now, since that point in time, asset protection has become a much more popular strategy because of the lawsuit crisis that some contend is plaguing the country. Now, it’s important at the outset to understand a couple of real basic fundamental things. First of all, we have to talk about what asset protection is not. It is very clear to understand that when you do estate planning, and that necessarily involves asset protection planning, that we’re not engage in any fraudulent activity. That is, we’re not trying to hinder or delay or impose obstacles for present-day creditors. That is prohibited by the law and is not what we’re engaged in here. Asset protection, on the other hand, is doing something to protect assets from future creditor claims at a time when you don’t have any creditor claims. In other words, the underlying facts give rise to any potential lawsuit that has not yet arisen making it really simple. If you are a physician, and you are, say a neurosurgeon, and you undergo a brain surgery that goes bad, for some reason, you think somebody may want to hold you liable. You cannot do asset protection planning, for the most part, once those underlying facts give rise to a potential loss. One of the things that Ohio and a handful of other states require is that before you transfer any assets into an asset protection vehicle, you have to sign what is called an affidavit of solvency. Now, some criticize some state laws where an affidavit of solvency is required. But the bottom line reality is that at the time of transfer of the asset, or any asset into an asset protection vehicle, you have to swear under oath. In other words, you have to sign an affidavit that says you’re not aware of any underlying facts that would give rise to a lawsuit that would render you insolvent. You’re not aware of anything that would give rise to not only litigation, but bankruptcy as well. In other words, you have to swear under oath, that you’re not contemplating filing bankruptcy. And furthermore, that the transfers into the asset protection vehicle will simply not render you insolvent.
We’ll talk a little bit more about the solvency requirement in a little bit. Another fundamental concept to understand is that debtor-creditor law, for the most part is a function of state law. You know, sometimes I think we forget that we truly are the United States of America. That is, that we have currently 50 states, by and large, debtor-creditor law, unlike some other forms of law, but debtor-creditor law, in particular, for the most part, with the exception of the bankruptcy code, is a function of your individual states. So, what a creditor might be able to do in Ohio, they may not be able to do in Wyoming. And there is no doubt that debtor creditor law varies significantly and widely from one jurisdiction to another. And it’s always important to understand what state law is going to control in any given situation. When there is a debtor-creditor issue, we could write a treatise. In fact, in law school, there is a class just trying to figure out the choice of law issue. That is, what jurisdictions law is going to apply in a given situation? For instance, say a situation in which you have a resident of Florida suing a resident of Ohio for an accident that occurred in Alabama, where is the lawsuit going to be held and what law is going to apply? One of the things that we have to understand about debtor creditor law, not only is it a function of state law, we also have to understand that debtor creditor law is impacted, to some degree, by the federal bankruptcy code.
Let’s just suffice it to say, today I’m not going to discuss the bankruptcy code issues as it pertains to asset protection. I will do that in a separate podcast. For those of you who have worked hard, and accumulated a nice nest egg, what you really want and need to know is, how do you protect it for the benefit of yourself during your lifetime, for your spouse, possibly for your children and grandchildren? Let’s take a look at the landscape of what tools are available to you. There are more tools available to you today than ever before. These tools have been enacted by various state legislatures to help you and I protect what we’ve worked so hard for. It has been a general progression since the 70s. And today, we are at the height of our asset protection capabilities. Today, we can protect almost all of the assets that you’ve worked so hard to accumulate. So, let’s talk about how we go about that. And let’s talk about it in terms that are very basic. We can talk about advanced strategies on another podcast. But today, I want to really focus in on some of the basics.
There are five different ways we go about protecting assets for our clients. And I don’t care whether a client is worth $100,000 or $100 million. Everybody needs to pay attention to the most basic fundamentals of asset protection so that their assets can be protected. So let’s talk about the steps of asset protection, as I’m fond of calling them. Step one, we need to understand what state law where you live, and what state law will protect. Let’s talk about the state of Ohio, and let’s talk about the most basic items. I’m not going to cover everything Ohio law protects, but I’m going to cover the basics. First and foremost, no good news, your retirement accounts. Think about this, your traditional IRAs, your Roth IRAs, your 401 K’s, your 403 B’s are all going to be 100%, fully protected by virtue of state law and during your lifetime while you own those assets, nobody can take those assets away from you. In other words, you could be driving down the road going too fast, you could hit a school bus, permanently injure three children, and kill three other children. And all six could hire the best TV lawyer in town, file a lawsuit against you and get a $50 million judgment. If all you own is your IRA or 401 K, they’re going to be fully protected. And the plaintiff’s lawyer, the creditor, claim that judgment, creditor claim cannot collect against those assets.
State law here in Ohio also protects the cash value that you may have in any life insurance policy. Also, a certain amount of equity in your home is automatically protected by state law, depending upon the number of owners of your home. Roughly speaking, the amount of equity in your home that is protected in 2023 is roughly about $137,500. Obviously, if you have a judgment above that and your home is worth more than that, then your home does have some exposure. So fundamentally, it is important to know here in Ohio that those assets, the IRAs 401 K’s, the 403 B’s, then your cash value in your life insurance and then some amount of your home equity are automatically protected. There remains some questions as to whether SIMPLE IRAs, SEP IRAs and Keogh plan assets are or are not protected. The issue is, they are not ERISA based plans. And therefore, there may be some question as to whether they are or are not. One simple thing most of us can do is convert them over to traditional IRAs. And then, they will get complete asset protection under state law. Now, again, just remember, I’m talking Ohio law here. These assets are not protected universally across the country and in any other state.
Having said that, other states have greater protection. Giving you an example, the state of Florida. Many of us remember the OJ Simpson trial, in which he was not convicted in the criminal case, but found liable in the civil case. OJ went to the state of Florida and purchased a very large, expensive home in order to protect his assets. Because under the law in the state of Florida, there is no cap on the amount of assets that you can put into a home and still have it protected. Another example, the state of Texas. A Texas colleague of mine informs me that Texas is where they always do things bigger and better. Not only does it fully protected unlimited amount in your household. It also includes the 20 acres adjacent to your house. So hopefully, that illustrates how state law is a little bit different. For many of my clients who are based here in Ohio, though, it’s important to understand what state law protects. Number two, when we talk asset protection, not only do we have to understand what state law protects, but we have to understand our insurance policies. Far too often, when clients come to see me, and I analyze their insurance policies, I find some weaknesses. Let’s talk a little bit about that.
First of all, please understand that a certain percentage of lawsuits every single year are not covered by your insurance policy. What types of lawsuits would not be covered? Well, first of all, let’s talk a little bit about what we call intentional acts. If you shoot somebody, you hit somebody, you assault them, there’s an assault and battery. How about if you remove a guard from a piece of machinery?What if you defame somebody? What if you discriminate against somebody? Sex Discrimination, race discrimination, age discrimination? You see, there are a wide range of potential lawsuits that your insurance policy simply will not cover. Most people don’t realize that. What’s the percentage? I cannot tell you what it is. I would estimate that it’s somewhere around 20 to 25% of the lawsuits are not going to be covered, or a portion of them will not be covered by your insurance. Also, understand that, for the most part, my clients have a separate insurance policy for their home compared to their auto and then may have a separate umbrella policy that sits over the two of them. And then if they have a business or a farm, they’re going to maybe have a separate policy.
Well, first of all, the benefit of the insurance policy. The reason we like to keep those insurance policies in effect, even if we have the best asset protection entity set up, is that the insurance company will give you a lawyer at no costs to defend your lawsuit in the event you get sued. So one, we want to keep the insurance in effect for that reason. And number two, it will provide some basic coverage so that possibly a settlement could be reached without you having to dig into your pocket. Also, not only will they provide a defense for you, but as I indicated, if you look on your declaration page, there will be liability limits on your homeowners and your auto insurance policy, as well as your umbrella policy.
Unfortunately, what I see all too often from Mike Lyons is that they are woefully underinsured. Most people have insurance who are clients of mine. I will say this, I am observing an increasing number of individuals, according to the state of Ohio statistics, an increasing number of people, perhaps as high as 25% of the people, who have no insurance at all.
Now, we got to talk a little bit about how do we protect ourselves from underinsured and uninsured claims. In the event of a car accident in which we’re hit by somebody who has no insurance, setting that issue aside for now, we can deal with that issue in a separate podcast. But let’s go back to the underlying limits. Typically, my clients come in with, say, 250,200 50,000 of coverage. That means that if for each event, you have $250,000 for the coverage for each lawsuit, or each claim that is made against you. And no matter the number of plaintiffs, if your limits are 252 5250 is going to be the maximum they’re going to pay out to all of the individuals who may be injured. If you have 250 500, they’re going to pay 250 per person, but $500,000 for the entire claim, and not a penny more. Now, if you have an umbrella policy, say for a million dollars, that will get added to the mix. That gets added on top of the underlying policy limits most often. But your basic auto policy, your basic homeowner’s policy, in my view, should provide at least $500,000 worth of coverage. And in my opinion, for most of my clients, they should add an umbrella policy on top of that. So your second line of defense is all about making sure that you’ve got quality insurance that will step up and pay a claim in the event that you’re at fault. That will prevent a judgment creditor from taking assets that you’ve worked so hard for.
Now, once we look at what is protected by being in our retirement accounts. And then number two, what is protected by our insurance, we then want to take a look at and see what remains unprotected. You, if you look at what remains unprotected, and that cause you some concern. That’s when we have to consider doing asset protection. In other words, think of it like this. If, on the one hand, you have assets that are protected, and on the other hand, you have assets that are not protected. If you were involved in a car accident and got a judgment against you, and they took away all the unprotected assets. If you could not live the life you want to live if you lost all of those assets because all you would be able to do is rely upon the protected assets. Then, you know, you need to do asset protection planning. I can’t say it any simpler than that.
What are the fundamental tools of asset protection planning that lawyers like me engage in on a regular basis? Well, we really have three separate tools above and beyond what’s protected by state law in our insurance. The first thing we have to understand is what is a limited liability company? How is it set up? How does it function? How does it work? A limited liability company is also called an LLC. I’m sure most of you who have seen different companies with the terms or the letters LLC attached to them, knows it stands for limited liability company. Now, what is the purpose of an LLC? The idea is this. If I take my brokerage account and place it inside of a limited liability company. In other words, I take it out of my revocable trust out of my name, or out of my joint name, and instead, I form a limited liability company. Let’s call it Gudorf investments LLC, and I take my brokerage account or my savings account, and I put it inside of this bucket inside of this entity and literally retitle it Got the custodian. So, now the account statements come in the name of Gudorf Investments, LLC. If I’m the only owner of that LLC, I am called the member. And I own what are called units in the LLC.Corporations have stock, LLCs have units. And if I am the only member, then I have total control over the management of those assets.
Now, let’s say I’ve got $1 million sitting in my brokerage account. It is titled in the name of Gudorf Investments, LLC. I’m driving down the road going too fast. I hit the proverbial school bus. I get the judgment against me for $50 million. The question comes, does the TV lawyer’s clients get my million dollar brokerage account? Do they? What do you think? Well, the answer under Ohio law, but not all 50 States’ law, is under Ohio law. First of all, as a single member LLC, the assets inside of the LLC are somewhat protected from the claims of any creditor. Good news is that the creditor cannot get a court order ordering me to reach into the LLC and give the money in it to the TV lawyer. That is that the most that the TV lawyer is going to get, they’ll go on to be able to go to the court and get an order called a charging order that says if Ted takes anything out of the LLC, I have to give it to the creditor. But there’s nothing that the court will do to ever force me during my lifetime to ever take anything out of the LLC. So obviously, it is limited protection. But it’s protection nonetheless. So the creditor can’t get at the money in the LLC. Ted can keep the money invested. But I don’t also have access to the money in the LLC because I have the judgment against me. So in Ohio, but not all jurisdictions, the charging order is the exclusive limited remedy. In other words, a creditor cannot go to court and foreclose upon my LLC membership unit and get an order to liquidate the brokerage account to pay the money to themselves.
Now, some of you are probably a little surprised that the LLC or the limited liability company does not offer more protection than charging order protection. And it’s important for you to know that it’s important for you to understand that while we appreciate having LLC law on the books is not the end all be all, it is not a panacea despite the fact that it has been on the books here in Ohio ever since the 70s. A lot of individuals who are trying to get additional creditor protection have been looking for a vehicle that would provide protection above and beyond what an LLC provides. Because if you’re sued and get a judgment against you, and you lose all access to your money, what good does it really do you? Well, not much during your lifetime. So the likelihood is this. If your creditor can’t reach it and you can’t reach it, the reality is, it’s going to result more likely than not, in a settlement. Maybe 30 cents on the dollar, something like that, you’re gonna want to move on, the creditors gonna want to move on. So, it does afford a substantial degree of protection for you. But it’s not the panacea that you would really like. Well, what has sprung up to help protect assets more so than limited liability companies is something that is called a domestic asset protection trust. I’ve recently written a chapter in a book for wealth counsel on domestic asset protection For us. If you have any interest in getting a copy of that article, just let me know and we’ll provide that chapter to you.
The domestic asset protection trust is largely favored by most estate planning attorneys. Now there are, I’ll admit, a few critics who do not believe that the domestic asset protection trust is as good as doing a foreign asset protection trust. Having said that, for those of us who are in the United States, who are practicing on a regular basis, and don’t have clients who have 10s of millions of dollars to put offshore, we welcome utilizing the domestic asset protection trust. There are now over 19 states, which have adopted a domestic asset protection statute, and Ohio is one of them. Ohio has called its version of the domestic asset protection trust, the Ohio Legacy Trust. It’s the same thing. It is the Ohio moniker for otherwise what other states call a DAP T. Ohio statute was very well written. It’s very powerful. It’s one of the best statutes in the country.
How does it work? And why does it work? Well, traditionally, historically, under the common law, it is important to understand that if you created a self-settled trust, that is, you are the one creating the trust, and you named yourself a beneficiary of that trust. Historically, under the common law, you could not protect any assets from any creditor claims whatsoever. You can’t create the trust and be a beneficiary of it and then somehow say these assets are protected. The DAP T statute turns all of that on its head. In these 19 jurisdictions, state statutes have been adopted that allows us to now create an irrevocable trust, name ourselves as a lifetime beneficiary of that trust, have all of the assets totally protected from creditors if we follow the proper steps, and that the Trust has the right language in it, in order for it to be protected. Now, one of the things that’s important is that the language of the trust must contain a spendthrift clause to trust in and of itself must be a form of an irrevocable trust. The trust maker, the person who creates the trust, is not allowed to be the trustee of the trust. Interestingly, though, a spouse or other family member can be a trustee. Now, the creator of the trust must not be doing it to hinder or delay any creditors. They must not be doing it to render themselves insolvent. And they have to sign in Ohio, an affidavit each and every time they transfer an asset into the trust They must say, sign the affidavit indicating those things.
Having said that, under Ohio law, if you take your brokerage account, let’s say the brokerage account that was put into the LLC that you are the manager of, and we take that brokerage account that’s in that limited liability company, and instead of your revocable trust, owning those membership units in the limited liability company, how about we take those units and transfer them to your Ohio Legacy Trust, of which you are a beneficiary. Maybe your spouse is a beneficiary, or your descendants are beneficiaries. Now, you’re driving down the road going too fast, or if you’re a physician, you’re the neurosurgeon who has a bad case arise or an accident in which several people are hurt seriously. And a lawsuit is filed against you and a judgment is rendered that is in excess of your insurance policy limits. Now, remember, lawsuits these days are rendering substantial verdicts. I have a case that I’m familiar with up in Miami County, Ohio. It involved a child being injured at birth. Long story short, the hospital did not settle the claim. The TV lawyer brought expert testimony to trial and said that it would cost today $22 million to raise a disabled child. The Miami County jury cut it in half and gave the 10-year-old $11 million. You and I are driving down the road going a little bit too fast. And we hit the school bus. That judgment is I would wage far greater than what our underlying insurance policy limits of $500,000, or even if you have an umbrella of 1.5 million. The important thing is to understand what we are up against.What is the potential for a verdict?
All of us are just one car accident away from a potential judgment against us where the judgment creditor will be able to take what we have worked so hard for, those assets that are exposed, your checking account, your savings account, your brokerage account, your rental properties, your farm, think about all the things that you own that are exposed to the creditor claim. Well, the law says now that if we take those assets and put them either in a limited liability company and have the limited liability company owned by the Ohio Legacy Trust or directly transfer them into the Legacy Trust, those assets cannot be taken away from us despite the fact that we may have a substantial judgment rendered against us. That is powerful. That is a big change in the law. It is a new day in the law. Now we’ve been able to create these Ohio legacy trusts only since January first, 2013. Our firm has created more than 100 of these Ohio legacy trusts. And we are creating them every single day for a variety of clients. Yes, it’s true. Asset protection started off with a number of physician clients that we have, particularly those who are involved in surgeries. So your neurosurgeons, your general surgeons, your OB-GYN are oftentimes some of the first, but having said that, it’s expanded far more than that. Anybody who has a substantial brokerage account, that’s in a, what we call a non-qualified account, should consider not only a limited liability company but adding the limited liability company and then placing it inside of an Ohio Legacy Trust makes all the sense in the world.
For our foreign clients. Virtually every foreign client that I’ve met has not engaged in any asset protection planning at all. If they had done anything 25 years ago, they set up a corporation. And I have to be the bearer of bad news to let them know that they really didn’t accomplish a whole lot just by setting up the corporation. Furthermore, they need to understand that unlike a limited liability company, a corporation that has stock, the stock of the corporation can be seized by a judgment creditor of the shareholder, and the assets of the corporation can, in fact, be liquidated. Try that one on for size. So asset protection necessarily involves considering putting assets in what is protected by state law, making sure that we have sound insurance in effect. Thirdly, creating appropriate, limited liability companies to own our underlying assets, including sometimes our brokerage accounts, our savings accounts, or our rental properties. And then lastly, taking assets and placing them inside of an Ohio Legacy Trust. Perhaps our home, perhaps our other rental properties that we own, can go inside of our Ohio Legacy Trust.
Now for those clients who have substantial assets and those particularly who were either born and raised in a foreign jurisdiction, considering a foreign asset protection trust is possible. Most of our Clients are comfortable with the domestic asset protection trust. And for those clients who want to consider a foreign asset protection trust, they’ll typically look at a jurisdiction that does not recognize judgments from US courts. There are a handful of independent jurisdictions, for instance, the Cook Islands or Nevis. Those are two countries that do not recognize US judgments. Oftentimes, that is why people will go to a foreign jurisdiction. They are worried about getting sued in the United States. They want to get away from the US court system. And so they’re going to go to a foreign jurisdiction. The future for asset protection is bright. We’ve got the tools now available for us to help you protect what you’ve worked so hard for. But just remember that time to repair the roof is when the sun is shining. That is no more true and asset protection than any other area of the law. We need to get it done. And we need to get it done before any incident that gives rise to any potential liability happens.
Well, this is Ted Gudorf. I’m signing off for today. Thank you for being with us. I hope that this brings you some clarity and some confidence with respect to moving forward with your estate planning and, in particular, your asset protection plan. Thank you so much for being with me today. Until our next session, just remember the time to repair the roof is when the sun is shining. To get started with your estate plan. You can go to Gudorflaw.com/gettingstarted. For a free copy of our recently published book called The Ohio Estate Planning Guide. Go to Gudorf law.com/book.
For anyone in need of an Estate Planning Attorney who is very well versed in Medicaid Planning, all types of Trusts and Tax Laws, I would not hesitate at all in recommending Ted. Read More
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