Attorneys are being targeted for lawsuits more than ever before. While malpractice insurance is an indispensable tool in the practice of law, not all malpractice claims fall conveniently within the policy limits of a lawyer's malpractice policy. Moreover, lawsuits against lawyers are not always limited to claims, which are covered by a lawyer's malpractice policy. Allegations of fraud or breach of fiduciary duty are common yet are excluded from coverage under most malpractice policies. Threats against a lawyer's personal assets also derive from risks outside the lawyer's law practice. In fact, the most common threat to a lawyer's net worth seem to be claims from failed investments or from causes of action not covered by general liability insurance.
Every lawyer, regardless of the lawyer's net worth, should consider the benefits of asset protection planning to protect a lawyer's financial well being. Unfortunately, most lawyers do not consider the benefits of an asset protection plan until it is too late. Timing is everything in asset protection planning. Generally speaking, an asset protection plan should be used only to protect against potential future creditors. Asset protection planning is not an excuse to defraud existing creditors. Use of otherwise legitimate asset protection techniques to defraud existing creditors will, in most cases, fail outright, and in the worst case, result in disbarment of the lawyer and even potential criminal liability. Thus, an attorney should evaluate asset protection options before a potential claim arises.
For an attorney, the point of beginning for any asset protection plan is the attorney's law practice itself. Many lawyers continue to practice law as unincorporated solo practitioners or as part of a loosely organized general partnership. While incorporating a law practice will not protect a lawyer against his or her own malpractice, lawyers practicing together may form a limited liability partnership or a professional corporation to protect themselves from the malpractice of their law partners. It will also help insulate lawyers from the vicarious liability of their employees.
On a personal basis, many forms of simple but effective asset protection are available to shield an attorney's personal assets from future risks. For example, federal law protects a participant's interest an any employee retirement plan that is regulated by the Employment Retirement Income Security Act, commonly known as ERISA, while state law protects most other retirement plans. By contributing a portion of the lawyer's income and savings into a protected retirement account, the lawyer can obtain a significant tax deduction for his contributions while simultaneously building a retirement fund, which is protected from future financial difficulties.
The ability to invest in an asset protected from potential future claims can also be found in state law. Texas is well known for its liberal homestead exemption, which exempts a person's homestead from virtually all creditor claims, except for taxes and purchase money liens, regardless of the value. An attorney who is desirous of protecting accumulated earnings may reduce the mortgage on the lawyer's homestead thereby increasing the amount of his sheltered equity in the property.
Another common and legal form of asset protection is to simply transfer property into the name of its intended beneficiaries. For example, cash and marketable securities can be transferred to an attorney's minor children under the Uniform Gifts to Minors Act. Alternatively, the attorney can transfer into a domestic trust, assets which are earmarked for the benefit of his or her minor children. Such an arrangement is ideal for building a college fund for the attorney's children which, if properly structured and operated, will be protected from the attorney's future creditors.
While domestic trust continue to be popular with many planners, the family limited partnership has become a favorite of many estate planning and asset protection practitioners. There are many asset protection benefits associated with the use of a family limited partnership. By transferring assets into a family limited partnership, the attorney can gift interest in the limited partnership to family members while still retaining control over the assets of the partnership as general partner. Substantial gift and estate tax benefits may be available using such an arrangement. The attorney can retain as little as a 1 percent interest in the partnership, transfer the remaining 99 percent interest in the limited partnership to his children or other family members and protect the transferred interest from the claims of the attorney's future creditors. Yet, the attorney would be able to retain control over all of the assets in his capacity as general partner, something he generally cannot do if using a domestic trust.
Unfortunately, while domestic trust work well to shelter assets transferred for the benefit of the lawyer's children and other family members, it will not work to protect any beneficial interest retained in the trust by the lawyer. In other words, the lawyer cannot benefit from assets transferred into a trust and still protect that benefit from future creditor claims. For example, in Texas the rule against self-settled trusts is found in b112.035 of the Texas Property Code. It provides that "if the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate." However, this limitation can be legally avoided by establishing the self-settled trust in an offshore jurisdiction that does not contain such prohibitions.
The use of offshore trusts to maximize legitimately the protection of a client's personal wealth has gained new recognition and acceptance in today's litigious society. Historically, offshore trusts have not generally enjoyed widespread acceptance in the legal community. To many, an offshore trust is something used only when someone has something to hide. However, much of this criticism is based upon myth or a lack of understanding of how or why a legitimate offshore trust works. For example, offshore trusts are often thought to succeed because of the strict secrecy laws found in many offshore jurisdictions where such trusts are formed. However, the offshore planner who establishes a legitimate offshore asset protection trust has no use for such secrecy laws. There are many advantages to going offshore to seek asset protection. By using the law of the foreign jurisdiction, the attorney can access the best law available to fulfill the lawyer's goal of effective but legitimate asset protection. Many offshore jurisdictions have adopted legislation specifically designed to offer the maximum amount of protection to the settlor and the assets transferred to a trust by the settlor. For example, almost all offshore jurisdictions will permit a settlor to establish a self-settled trust without subjecting such interest to the claims of future creditors. The settlor is thus allowed to retain beneficial enjoyment of assets transferred into the trust and even retain some control over the assets for the benefit of the lawyer's family. Although it is typically a better planning strategy to avoid any unnecessary control on the part of the settlor, the fact that the settlor has retained a beneficial interest in the trust or has a right to exercise certain defined powers in the trust has, in many jurisdictions, been expressly permitted by statute.
Many options and strategies are available to an attorney to shelter personal assets against the uncertainties of ever increasing litigation risk in today's litigious society. With careful planning in selecting and establishing an appropriate asset protection plan, an attorney should be able to take steps to shelter his net worth to insure it is available for the attorney and the attorney is family when it is needed most.
TLIE greatly appreciates the contribution of this article by Mr. Mata, shareholder of Wright & Greenhill, P. C. He may be reached at (512) 476-4600.
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