Wednesday, August 19, 2009

Tough Times Could Get Tougher

   Dark clouds are all around us.  The stock market is down.  Real estate values are down.  Layoffs are up.  But, it could be even worse!

     With tough economic times, people often look to hold others accountable for their difficulties.  Which is why lawsuits tend to rise as the enonomy sinks.  In fact, surveys of corporate law departments shows increased expectations for litigation.  So, what can you do to protect yourself?

     First, consider placing your business or rental property in a limited liability entity.  Let's say you own a corner market.  If you own it directly, then someone who is injured on the premises could collect against all your assets, including assets not involved in the business.  This could include things like your home and the money you've set aside for your children's education.  Let's say your business has assets of $500,000, you have a home worth $500,000, and you have brokerage accounts worth $500,000.  The entire $1.5 million could be in jeopardy.

     However,if your business were owned by a corporation or a Limited Liability Company (LLC), for example, the injured person could only collect against the $500,000 of assets in the entity, regardless of the amount of the damages awarded to the injured party.  Your home and brokerage accounts would be safe.

     Second, consider liability insurance.  If someone sues you, that is your first line of defense.  There is seperate liability coverage for your home and your auto.  In addition, you may need a seperate policy for a rental property or any business-related liability, like malpractice insurance for a doctor.  In addition to these seperate liability policies, consider an "umbrella" policy" which provides coverage on top of the underlying coverage.  If you had a premises liability for your corner market, that policy would protect you up to the policy limit, let's say $300,000.  This would pay first.  Then your umbrella coverage would add its limit, let's say $1 million, on top of that.  So, you would be protected for the first $1.3 million of court awards against you.  However, that would still leave some exposure to liability above the $1.3 million, if you did not have a limited liability entity.

     Third, leave assets to your children in a manner which protects them.  A trust can protect your children and the assets you leave them from your children's creditors, their future ex-spouses, taxes, and even their own misjudgement.  A qualified estate planning attorney can help structure a plan that limits liability for you and your family.