California is known for its sublime weather and laid-back lifestyle. But it’s also notorious for one far less savory aspect…excessive litigation. If you live in L.A. or any part of California, the odds are unfortunately higher you might end up on the receiving end of a lawsuit at some point in time. That’s why asset protection should be an essential part of your financial planning process. This article will discuss integrating protective strategies into your overall Los Angeles wealth management plan.
An Often-Ignored Aspect of Los Angeles Wealth Management
Most financial advisors help you with investments, financial planning, and estate planning, but does the specific topic of asset protection ever come up? It should, since, according to an ATR article about “Judicial Hellholes,” California has ranked near the top for the past 15 years for lawsuit volume.
Worse, lawyers are actively trying to increase that number. According to the American Tort Reform Association, local advertising by attorneys has been growing, with over $125 million spent in California on average annually.
You Must Think Defensively, Too
Most successful people, by nature, are optimistic. That’s understandable since that probably played a factor in your success. But once you’ve amassed a significant net worth, you need a different set of skills to maintain it. Part of that is focusing on asset preservation and self-defense.
But too many people don’t take time for asset protection, and many times, their advisors ignore it as well. That’s a mistake, especially if you’re a business owner, landlord or anyone with significant assets:
- When you have a high net worth, you become a more attractive target.
- If you have employees, issues can always arise that you didn’t anticipate where you may have liability.
- As a property owner, there’s often plenty of opportunity for accidents or issues that may cause harm to tenants or other people.
- A legal claim doesn’t even have to have merit to require you to defend it, which can be extremely costly.
- Juries can sometimes give astonishingly high results, especially in California.
This is where an ounce of prevention is truly worth a pound of cure. That’s because multi-million dollar judgments or settlements can have a lasting impact on your financial future. But just as bad, the entire legal process can have a significant emotional impact. If your business is involved, it can create an immense distraction at a minimum or even impact your company’s reputation in the eyes of customers and other stakeholders.
What about Arbitration—Isn’t it Cheaper and Faster?
Many businesses put arbitration clauses in all their contracts, thinking that can give them more control to prevent bad outcomes. Unfortunately, today, that system is not the panacea it was once thought to be. In fact, arbitration can often be worse than litigating in court. Instead of having an impartial judge paid by the courts, you are on the hook to pay the arbitrator, who may have some conflicts of interest you may never hear about. In California, the arbitrator is not required to follow the rules of evidence, and you generally can’t appeal the result, even if there are errors or oversights.
With few limits, today’s arbitration can be as expensive and time-consuming as traditional litigation.
The Cost of Not Protecting Your Assets: Legal Fees, Settlements and Judgements
You’ve probably heard horror stories of people dealing with six-figure legal bills or having a lawsuit settlement set them back significantly. In some cases, people lose their entire business due to a lawsuit. Unfortunately, that’s not all that rare, especially in the Golden State.
According to a report by Marsh McLennan, personal liability settlements of $10 million or more are on the rise. When wading into the realm of business disputes, multi-million dollar settlements or judgments are not unusual.
And unfortunately, many of life’s unexpected events are out of our control. If they happen on your property or on your business’s premises, it can be devastating if you haven’t taken the time to shield your assets. The Marsh McLennan report includes a recent example where two parents filed a lawsuit when their young daughter almost drowned in a neighbor’s swimming pool that was not properly fenced. The accident sadly resulted in a severe brain injury in the young child. The jury awarded the plaintiffs $100 million for this accident.
Make Yourself an Unattractive Target
The goal of asset protection isn’t to lawsuit-proof your life. There’s no way to do that, unfortunately. But what you can do is make yourself much less attractive as a target.
Think of it as creating a financial fortress around your wealth, making it challenging for attorneys to identify you as a reasonable target. That’s what asset protection strategies can do for you.
What Type of Asset Protection Strategies are Commonly Used?
There are various ways to help shield investments and accounts, so they are out of easy reach of creditors in case of a lawsuit. Here are some of the asset protection strategies that are commonly used to help fortify your financial plan:
- Insurance: This may include increasing liability limits on various policies and purchasing a separate umbrella policy to provide additional liability coverage.
- LLCs or other Corporate Structures: These can shield your personal assets from business activities. Also, using LLCs or other structures can be helpful in holding real estate and other assets.
- Retirement Accounts: Increasing contributions to certain retirement accounts can sometimes help protect retirement assets from creditors.
- Trusts: Certain types of trusts can be used to transfer and hold assets, providing privacy and creditor protections.
- Asset Titling: Asset title strategies may help protect assets from the debts of one individual owner as well as provide increased privacy.
These strategies need to be coordinated and personalized to your needs, so discuss these with your financial advisor and attorney.
One key: you need to put the protections in place well before any inkling of liability exists. Otherwise, the courts can often reverse everything. That’s why it’s smart to get a strategy implemented sooner rather than later.
There’s No Guaranteed Protection
One caveat, though. These strategies can offer some level of protection, but no plan can guarantee complete immunity from all potential risks. That’s just not possible. However, many of these strategies are very practical since holding assets separately can make these invisible to attorneys determining your ability to pay. This alone can be very helpful in discouraging frivolous lawsuits or serious legal action.
Key Takeaway
In California, asset protection is not a luxury; it’s a necessity for anyone serious about safeguarding their wealth. Start early, consult with your financial advisor and attorney, and then, most importantly, follow through. Remember, it’s not about making yourself lawsuit-proof but about making yourself a less attractive target for legal complications. In this litigious landscape, taking these Los Angeles wealth management steps can provide you peace of mind that you’re doing everything you can to preserve your wealth and your future.
Wondering if your money can be working harder for you?
Our GIPS® compliant team of wealth managers and financial planners are here to help you achieve your goals. If you’ve got $200,000 or more available to invest, contact Arroyo Investment Group for a free financial second opinion to see if we can help.
