Protect your wallet from lawsuits

We are increasingly turning to a litigation community. Stories abound of lewd lawsuits, extortion lawsuits, data leaks, professional negligence, and workplace discrimination cases. And the Covid-19 pandemic has opened a whole new can of worms when it comes to liability lawsuits.

Even worse, you don’t have to be charged with a widespread fraud or liability crime to be prosecuted. These days, one may face responsibility even if they have done nothing wrong. Therefore, asset protection planning is an important form of wealth planning. Good business and property planning can isolate your assets from potential court actions in the future. But you need to plan and act early.

By the time a lawsuit is filed, and you’re desperately searching the internet for guidance, it’s probably too late to protect yourself.

Although nothing can make your fortune bulletproof, the following steps may prove effective in creating a protective shield around your assets—or at least putting obstacles between your fortune and your letter:

Save the lifeline for retirement

Putting money into retirement accounts is one way to protect your wealth. Creditors may pursue you if you lose a lawsuit and have unpaid debts. If the amount of money you owe forces you to file for bankruptcy, your retirement account will likely be protected.

Says Cynthia Keat, Principal, Stewart & Kett Financial Advisors Inc. In Toronto: “RRSPs, RRIFs, and DPSPs offer some protection from creditors in bankruptcy. However, if a defendant does not declare bankruptcy, these assets will not be protected in the event of legal action.”

She adds that registered pension plans and individual pension plans (IPPs) also provide protection for creditors.

You can also put some of your retirement savings into a spousal RRSP. This may make your money resistant to litigation, as long as your spouse is not exposed to lawsuits or creditors.

Use Asset Protection Funds

Entrepreneurs and professionals with large assets can consider the option of establishing a family credit. In a trust, the use of property is separated from legal ownership. Effectively, you are allowed to transfer the beneficiaries’ ownership of your property to your family members without giving them control of those assets.

Asset protection trusts can keep property out of creditors’ reach in the event any of your beneficiaries — members of your family — face a lawsuit.

“Trusts may provide protection from creditors and legal claims if they are properly structured,” says Kett. “A trust is a separate taxpayer and entity established by the settlor, who transfers the initial asset to the trust.”

But she cautions that trusts are advanced planning tools that require professional advice to be properly implemented.

You could also consider holding your assets in an external trust to make it more difficult, not to mention costly, for suitors to access your assets.

“Offshore trusts certainly make access to assets more difficult because claimants must pursue their claims in foreign jurisdictions,” says Kit, stressing that “the cost, inconvenience, and complexity of doing so discourages small claims.”

Transfer of ownership of real estate

One of the easiest things for creditors to target in a lawsuit is your real estate assets. It is critical to plan for the possibility of such claims.

“The most common methods are the acquisition of real estate in the name of the spouse or an adult family member, if they are not subject to the same risk of liability, or of registering the estate in the name of a corporation or trust, perhaps as a nude trustee, suggests Kate.

Doing so creates a protective fence around your family home and is off-limits to creditors. Make sure you choose a family member who is not a guarantor of any of your personal or business debts.

Use an insurance umbrella

When you have a large fortune to protect, you may need insurance coverage that outweighs your primary home, car, or similar policies. A comprehensive insurance policy can be one of your main lines of defense in a range of potential lawsuits.

“Investments in life insurance policies and/or separate funds are protected from creditors, so they may be a place to invest surplus venture capital,” Kate emphasizes.

Insurance policies for professional errors and omissions; responsibility of managers and employees; Or comprehensive liability insurance can provide liability coverage for defense costs and claims, subject to a deductible.

A comprehensive insurance policy protects against unforeseen events, such as slip and fall injury claims arising from unsalted trails during the snow season.

If you are a business owner, you may want to place yourself under employment practices liability coverage that can protect your business from potentially high costs of employment lawsuits.

Highly paid occupations that are prone to litigation can also benefit from additional insurance. “Professional societies such as those for physicians, lawyers, and accountants offer profession-specific liability policies to their members,” says Kate.

In fact, the College of Physicians and Surgeons of Ontario (CPSO) mandates medical liability protection as a requirement for physicians to be licensed.

merge and isolate

Operating companies and rental properties may be subject to high potential legal claims. How you organize your business has a lot to do with how well you protect your assets.

Depending on the size of your business, you may want to consider incorporating your business. “It may be desirable to set up an operating company (Opco) to isolate the risk from that entity,” Kett says, but cautions that if the company’s owners provide personal guarantees, the risk will pass on to them personally.

Furthermore, excess retained earnings can be transferred “from Opco to a holding company (Holdco), to put passive investment assets out of reach of Opco’s claimants,” she said.

Incorporation limits the liability of the company’s shareholders because they are not liable for the company’s debts, according to the Industry Canada website.

In a world where people can be sued on flimsy grounds, owners of critical assets can be an attractive target for high-profile litigation. These safeguards can help prevent claims about your business and personal assets arising from a lawsuit.

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