Protecting your portfolio of lawsuits

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We are becoming more and more of a litigious society. Histories of defamatory lawsuits and those arising from extortion, data leaks, professional negligence and workplace discrimination cases abound. And the Covid-19 pandemic has opened a brand new can of worms when it comes to liability lawsuits.

Worse yet, you don’t have to be charged with a large-scale fraud or liability crime to be sued. These days, one could face responsibility even if he did nothing wrong. Asset protection planning, therefore, is an important form of estate planning. Good business and estate planning can protect your assets from potential future court proceedings. But you need to plan and act in advance.

By the time you get slapped with a lawsuit, and you’re desperately trawling internet as a guide, it’s probably too late to protect yourself.

While nothing can bulletproof your wealth, the following steps can be effective in creating a protective shield around your assets, or at least putting barriers between your wealth and suitors:

Keep a retirement lifesaver

Putting money in retirement accounts is one way to protect your wealth. Creditors could come after 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 is most likely protected.

“RRSPs, RRIFs and DPSPs offer some protection from creditors in bankruptcy situations,” says Cynthia Kett, principal at Stewart & Kett Financial Advisors Inc. in Toronto. “However, if the defendant does not file for bankruptcy, these assets will not be protected in the event of legal action,” she adds.

Registered pension plans and individual pension plans (IPPs) also offer creditor protection, it adds.

You could also put some of your retirement savings into a spousal RRSP. This could make your funds litigation-proof, as long as your spouse is not exposed to lawsuits or creditors.

Use asset protection trusts

Entrepreneurs and professionals with significant assets may want to consider setting up a family trust. In a trust, the use of the property is separate from the legal ownership. Effectively, you are allowed to transfer the beneficial ownership of your property to your family members without giving them control over those assets.

Asset protection trusts can keep property out of the reach of creditors in case any of the beneficiaries (members of your family) face a lawsuit.

“Trusts can offer protection against legal and creditor claims if they are properly structured,” says Kett. “A trust is a separate entity and contributor established by a settlor, who transfers the initial asset to the trust.”

However, he cautions that trusts are advanced planning tools that require professional advice to properly implement.

You might also consider keeping your assets in an offshore trust to make it more difficult, not to mention costly, for suitors to access your assets.

“Certainly, offshore trusts make it difficult to access assets because claimants must file their claims in foreign jurisdictions,” Kett says, emphasizing that “the cost, inconvenience and complexity of doing so discourage small claims.”

Transfer of ownership of real estate

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

“The most common techniques are to hold real estate in the name of a spouse or adult family member, if they are not subject to the same liability risks, or to register the real estate in the name of a corporation or trust, possibly as a simple trustee. Kett suggests.

Doing this creates a protective fence around your family’s home and makes it out of the reach of creditors. Be sure to choose a family member who is not a guarantor for any of your personal or business debts.

Use an insurance umbrella

When you have significant wealth to protect, you may need insurance coverage that goes beyond your primary home, auto, or similar policies. An umbrella insurance policy could be one of your main lines of defense in a variety of lawsuit possibilities.

“Investments in life insurance policies and/or segregated funds they are protected from creditors, so they can be a place to invest excess investment capital,” says Kett.

Insurance policies for Professional Errors and Omissions; Liability of Directors and Officers; o General liability insurance may provide liability coverage for defense costs and claims, subject to a deductible amount.

An umbrella insurance policy protects against unexpected events, such as slip and fall injury claims arising from unsalted driveways during the snow season.

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

High-paying, litigation-prone professions could also benefit from additional insurance. “Professional associations, such as those for doctors, lawyers and accountants, offer profession-specific liability policies to their members,” says Kett.

In fact, the Mandates of the College of Physicians and Surgeons of Ontario (CPSO) medical liability protection as a condition for licensing physicians.

incorporate and isolate

Operating businesses and rental real estate may be subject to high potential liability claims. The way your business is structured has a lot to do with how well your assets are protected.

Depending on the size of your business, you may want to consider incorporating your business. “It may be advisable to form an operating corporation (Opco) to isolate the risks to that entity,” says Kett, but cautions that if the owners of the corporation offer personal guarantees, the risk would be transferred to them, personally.

In addition, excess retained earnings can be transferred “out of Opco to a holding company (Holdco), to put passive investment assets out of reach of Opco claimants,” it says.

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

In a world where people can be sued for the smallest of reasons, those with significant assets can be an attractive target for large payout litigation. These preventative measures can help prevent claims on your business and personal property arising from a lawsuit.

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