This is probably geared towards tort lawyers, but anyone is welcome to chime in.
Let’s take the case of a simple car wreck. My state requires 20/40/10 for minimum car insurance. I have 100/300/100 as an extra backup.
But I recently read of a case near where I live where a Fed Ex driver cross the center line, hit a car, and left a 5 year old boy paralyzed for life. His estimated lifetime medical costs were $13 million. The case settled and the settlement was sealed. Usually for specials, a person gets between 2.5 and 3.5 times actual damages for special damages like pain and suffering, loss of enjoyment, etc. So, even at these high numbers, I can’t imagine a settlement at less than $25 or $30 million dollars.
However, this was Fed Ex, so I’m sure they had an insurance policy to pay.
What if in a moment of inattention, I was the driver of the car? I would lose everything. Sure, I could get an umbrella policy, but for how much? $50 million? Would that be enough?
Most people don’t do that. Are we all just taking the chance that we won’t cripple a 5 year old boy and exposing our personal assets otherwise?
Accidents like that are fairly rare. But it could happen. Really, there’s not much you can do about it. A $50 million insurance policy would be a heavy burden to carry year after year. Basically you just have to keep driving and hope you don’t cause a massive accident.
I think the conventional wisdom is exactly what you suggest - an umbrella policy. These are cheaper (per $ of coverage) than something like auto insurance because they only kick in to pay for overages that other policies don’t pay.
Since most debts, including most (although not all) legal judgments, can be settled through bankruptcy, you only stand to lose any assets that would not be protected in a bankruptcy.
As long as you don’t do it as a fraudulent conveyance, you can probably avoid those problems with an irrevocable trust. It’s been a while since I took trusts and estates, but there shouldn’t be a problem with putting all of your assets into such a trust and making yourself the administrator as long as you aren’t the sole beneficiary.
As I recall, a trust is only a sham if you are the creator, administrator and sole beneficiary. Otherwise, the trust will be treated as a legal person and the assets should be untouchable.
But standard caveat, I’m completely shooting from the hip here and this is a very specialized area of the law so to even contemplate this you will need a trusts and estates specialist.
^ Wait. So I can put all of my assets into a trust, naming me a beneficiary at 99% of the trust, and say, my uncle Andrew at 1% of the trust, and my assets are totally protected?
That can’t be right. Can it?
Actually, I think you can give yourself a life estate in the trust as long as the remainder goes to someone else, but I might be wrong about that. LIke I said, it’s been a while.
edit: no, I take that back. The general rule is that a trust has 3 components creator, beneficiary and administrator - although I’m not using the correct terms I fear. You can’t occupy all 3 positions, but I’m pretty sure there are ways around that.
But wouldn’t the beneficial rights be touchable? In other words, you’d be trading the risk that you might lose a multi-million dollar lawsuit for the risk that the beneficiary might do so?
Right, but the corpus would be untouchable. At least I think so. I did a little research after that post and it seems that the admin is called the trustee who holds the legal title to the corpus. The beneficiary(s) holds equitable title.
Since you can’t be creator, trustee and beneficiary you would probably set it up to have someone else as trustee such that you would only have equitable title. Then if you were sued, what someone could get would probably depend on how the trust is administered, but I’m guessing here.
So let’s say that you get an annual stipend from the trust. I would guess that this could be garnished like a salary, but they certainly couldn’t take all of it. The question would then be use of trust assets. Let’s say that you and you alone have the right to reside in property owned by the trust. That would have no value so they couldn’t take that and the trustee couldn’t be forced to rent the property to someone else.
Vehicles and other chattels owned by the trust could be handled the same way. It’s really all down to your imagination and the skill of your lawyer I would think.
Funny thing is that I am taking Wealth Transfers, but we don’t talk about trusts until next month. However, from my limited knowledge, wouldn’t you have to make the trust a spendthrift one so that you don’t have access to the corpus of the trust? Because, IIRC, whatever access or benefits to the trust that you have personally, your creditors can also get.
So you would have to give yourself a life estate in your house (meaning you could never sell it).And even a life estate in property has value. Couldn’t they sell your life estate in your house?
IDK, but it seems to me it depends a lot on how the trust is set up. Let’s say I set it up for a third party and say that only they can occupy trust property. If they choose not to, the trustee can’t be forced to rent or otherwise encumber the property during the life of the beneficiary. I don’t see a problem with that, but again, IDK.
Also, it might depend on how much discretion you give the trustee. Since they have actual legal ownership and can bestow and revoke privileges to the corpus, going after those privileges would be at best like chasing after a yo-yo wouldn’t it?
How would that work for a primary residence? I don’t want a third-party living in my home. I want to live in my home. How would I set up a trust that allows me ownership of the home, or at least a life estate, without creditors being able to touch my ownership or my life estate.
Whatever rights I would have in my home, my creditors would have those same rights.
**Further, I don’t live in a state with a full homestead exemption. My state allows a $5k exemption against judgments, and a $25k exemption in bankruptcy. If I lose a judgment, and even if I declare bankruptcy, I lose my home and have a $25k check to apparantely buy a tobacco barn to live in.
Okay, so to be clear, I am person A and person B is my friend and trustee.
I create a trust and appoint B as trustee. I instruct that all property of the trust can only be for the use of A. I then transfer my house to the trust.
No. All property is to be used at the discretion of the trustee to include the beneficial use by one or more beneficiaries exclusively.
Look. I’m not an estates and trusts guy so I’m not going to argue this with you. It might not work. I think it would but I won’t argue the point.
However consider this. I own a corporation. You’re a VP. I let you use the ski lodge in Aspen whenever you want. What benefit is that to your creditors?
I’m not trying to argue, either, because as I’ve said, I really don’t know. But from my limited knowledge, as a VP of that corporation, I would have to report a “whenever I want to use the ski lodge” value as income for tax purposes, but as long as others were allowed the same privilege and it was customary in the industry, the ski lodge wouldn’t be subject to my creditors.
However, if in our hypo here, the ski lodge used to be my primary home that I gave to the corporation and I am the only one allowed to live there, or that the other 3 people allowed to live there are my friends and never take advantage of it, that a court would probably see this for the sham transaction that it is.
I would guess that the court would view it as a fraudulent conveyance and that the corporation is simply acting as my agent by holding it. No different than if you gave your antique gun collection to your brother the day before you declared bankruptcy.
My brother would have legal title to my guns, but we all see that it is simply a ruse and he is just holding them for me so I don’t lose them to my creditors.
The trust under discussion is called a “self-settled spendthrift trust,” where the creator is also a beneficiary and is seeking to protect assets from creditors. Almost all states will disregard that trust form and permit the creator’s creditors to reach the trust’s assets.
Also, personal injury judgments typically are not dischargeable in bankruptcy.
Ultimately, the OP’s question does just boil down to how much one opts to insure. Lifetime medical costs for a child is probably one of the biggest judgments one might face, but note that the present value of $15 million paid over the next 50 years is arguably less than $2 million.