Legal Methods of Asset Protection This is a free Web Book, funded in part by advertising

The cover story for the April 24, 1995 issue of Medical Economics is about a doctor who was held liable by the trial court for a $15 million judgment where he attempted to help two people who were the victims of another doctor's negligence. The trial court in Texas refused to separate the second doctor from the first, and the jury found that the second doctor was 25% at "fault" even though the plaintiffs presented no experts who would argue that the second doctor was negligent in any way and even though ten experts testified that the second doctor did everything medically possible to help the two patients. The total judgment was for $15 million. The Texas State Board of Medical Examiners had revoked the license of the negligent doctor who had declared bankruptcy - so the second doctor was held liable for the entire judgment. On appeal, the second doctor was exonerated on the basis that his treatment had not been a proximate cause of the plaintiff's injuries. The appellate court did not address the issue of joint and several liability in this case. 

Regardless of whether you are a doctor, this could happen to you in many of the fifty states, if you are a partner, a participant in a joint venture, one of many persons involved in an accident, as one of many people indirectly involved in a sex discrimination case, an ADA case or a toxic site case. It's nearly impossible to list all of the many ways that one person can become jointly and severally liable for an injury to someone without having been personally negligent with respect to those specific injuries. In many cases, it's enough that you are or were connected in some way. If you are one of a number of people who are brought together as defendants, and if the other defendants are without assets or insurance, you could end up with the "short straw". 

How can you protect yourself? By segregating your assets in the many ways that have been described in past issues of these reports. By using a combination of methods like a family foundation or charitable trust, one or more family limited partnerships, corporations in which you are not the controlling shareholder, foreign trusts, bankruptcy exemptions permitted in your state and by making gifts of assets to parents, children and your spouse long before a claim is filed against you. 

The June 26, 1995 issue of Medical Economics (page 53) reports that the pro-life advocates are using lawsuits as another way to push their campaign against doctors who do abortions. Even when the lawsuits are lost in the courts, the plaintiffs have won on a political level. Of course, some of the pro-choice advocates could soon begin to pursue the same strategy against their opponents. 

If you are involved in a highly controversial political issue, you may find your opponents resorting to the courts as a weapon in their cause. By targeting you for civil lawsuits, they can get adverse publicity against you, consume your financial resources, and sully your business reputation. They could also put you in a position of being unable to get insurance coverage. This is just one more of the many reasons why anyone with significant assets is in need of some premeditated asset protection.

The Wall Street Journal (5/26/95) reports that the Prodigy on line service was responsible for the libelous statements of a subscriber because it advertised that it monitored such messages. The issue was whether Prodigy was merely a conduit, like a telephone company, or whether it was acting as a "publisher", with some control over the content. 

While you might not be as big as Prodigy and you might not be providing a computer service, this case may apply to you if you sponsor or support any kind of moderated discussion group on the Internet. It seems to me (from my perspective as an electronic publisher) that you either have to make it very clear that the discussion group you sponsor is completely open and unmoderated or you have to maintain some significant control over the content of the messages that are sent to the entire group. If you allow a participant to make a derogatory statement about any individual or company, that person or company can sue you for libel. That's why I enforce the rule for my discussion group that if you can't say something nice, don't say anything at all. 

While a truthful statement is generally a defense against a libel suit, it won't protect you from the legal expenses and the time involved in defending yourself.

Holzman has teamed up with attorney Allen Engerman to found the NCRB, which reviews benefit computations on a contingent fee basis. They will review, analyze and/or audit the computations of an employee's retirement benefit for 50% of any increased money that accrues to the employee as a result of their services. 

If you are an employee who is going to receive a significant distribution from an employer, you might want to contact them to make sure you are getting everything you are entitled to receive under the plan. (You can call them at 800-666-1000) 

But ... if you are an employer, Holzman and Engerman are confident that you have probably understated the benefits due your employees. Assuming that isn't intentional, you might want to check with your own pension advisors to explore ways to review the accuracy of your benefit computations. (Holzman and Engerman are so busy examining benefit computations for employees that they don't seem to be interested in doing the same thing for employers.) 

I found out about them because they contacted me as the editor of a financial publication. Judging from the press kit they sent me, they are getting a lot of publicity. That means your employees, (current and former) are likely to find out about them before long.

• I'm located in New York, but have a friend who needs a good medical malpractice lawyer in the Houston area. Is anyone interested? Or do any of you know a medical malpractice lawyer with a good reputation? Please contact me ASAP, as my friend is going in for surgery very soon.

"Isn't it interesting that this lawyer .. needs a good medical malpractice attorney before the friend has surgery?" 

Richard Duke, an author, professor of law and international tax specialist, sent me the following observation.

• Vern: As a follow up. A good trial lawyer will file a conspiracy charge against this lawyer if in fact a lawsuit is later filed by this person going into surgery. If it is a real good trial lawyer suing the lawyer looking for a malpractice lawyer, the trial lawyer will "sting him good."

Apparently F. Lee Bailey felt that $20 + million might be worth six months in jail. But some folks can get a lot more than six months. A recent story in the Money Laundering Alert tells of a drug dealer who agreed to turn over $150 million to the government to avoid jail time. It seems this person was told she would stay in jail as long as it took to give up the money. Bailey was lucky or had some connections. If the government really wanted the money, it could have been a lot more than six months for Bailey.

It seems to me that there are two very distinct sources of concern about asset protection. One is the litigation epidemic, where everyone with any money is like a sitting duck for a civil lawsuit from anyone who is willing to allege that they have been injured in some manner by the defendant. The second source of concern is the growing area of civil forfeiture and related ways in which the government can take our property. 

Some commentators on the subject have been critical of the use of domestic structures such as limited partnerships, limited liability companies, corporations, charitable trusts, irrevocable life insurance trusts and outright gifts on the grounds that these structures are subject to the vagaries of U.S. judges and juries.

Frankly, if any of us get on the wrong side of some government agency, I agree that domestic partnerships, corporations, charitable trusts and even outright gifts to others may have little value in protecting our assets from forfeiture or some other means of appropriation. Even offshore trusts may not work because a U.S. court could threaten to put you in jail if you refuse to return the property to the U.S. Never mind that you may not have the power to comply. The judge makes the law until you can appeal. 

If your greatest fear is about losing your assets to your own government, it seems to me the safest course of action is to move abroad and to take your assets with you. For those who worry about an outlaw government, there is no legal safeguard I can think of to protect your assets within the jurisdiction of the government. 

Hopefully, some of the political pressures for change will greatly reduce the risk of increasing the powers of the government to violate the intent of the Constitution by permitting government employees to conduct witch hunts to secure property without due process or just cause. Meanwhile, we each have to decide whether we prefer to stay here or to leave. For those who decide to stay, the most effective method of asset protection appears to be a foreign trust, perhaps combined with a foreign limited liability company..

If this case is decided for the plaintiff, it will have to be right up there with the scalding coffee suit against McDonalds as one of the most “Absurd Awards”. The February 27, 1997 issue of The Wall Street Journal reported that an environmental regulator is suing a nuclear waste disposal company because the disposal company allegedly refused to pay the regulator for certain favors the regulator conferred on the waste disposal company. What a strange world we live in. 

And - even if the plaintiff doesn't win the suit, it will cost the defendant or his insurance company some substantial legal fees. If the defendant has liability insurance that is broad enough to cover this kind of claim, the insurance company will probably pressure the defendant to settle. But it's much more likely that the insurance company will have some clause in their contract that will excuse them from liability in this case.

Here are three examples of the need for asset protection from our editorial advisor, Bill Comer.

• A movie theater was required to pay legal fees and to settle with a woman who sued the theater chain because their seats were too small for her. She weighed 360 pounds.

• A company that provides electronic home monitoring security was found liable for the death of a man who was murdered by a convicted felon who escaped from house arrest when the monitoring system broke down.

In his book, the Professional Asset Protection Manual, Mark Warda, one of our editorial advisors, gives some additional examples of some absurd awards that juries “have been handing out”. For example,

• * $41 million for a misdiagnoses of abdominal pain

* $49 million for a stillborn baby
* $84.5 million for children drowned and brain damaged in a swimming pool
* $986,000 to a woman who lost her “psychic powers” after a CAT scan
* $300,000 for slapping a daughter twice on the face
* $60,000 for cursing, which caused “emotional distress”
* $75,000 for spraying perfume on a person without permission
* $5.87 million for sponsoring a party where a guest later caused an auto accident

• * $12.7 million for a mistake in medication administered by a nurse

* $7 million to a laborer who lost a limb at work on a construction job
* $12 million to a doctor for failing to take a blood test for a rare disorder
* $160,000 to an employee who was “goosed” by fellow employees

I’ve recently heard from a subscriber that Medicare can apparently go back as long as they wish to impose claims regarding alleged overcharges for patient services. This puts doctors in the position of having a financial sword hanging over their head for the gross billings to all of their Medicare/Medicaid patients for as long as the doctor has been in practice. Not only does this put a huge record keeping burden on the doctors, but it also appears to sidestep normal statutes of limitations in commercial transactions. I’d welcome any details to confirm or refute this contention.

If you try to take cash out of the country without filing the required reports with the customs service, the government will try to take it all. A recent case in which the government took possession of $357, 144 in cash under this rule, as reported by the New York Times, will be reviewed by the Supreme Court. The Circuit Court of Appeals in California held that the fine was unconstitutional because it was in violation of the Eighth Amendment, which says,

• Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

ADA Has Become A Bonanza For Lawyers

A ruling from the EEOC says that the Americans With Disabilities Act gives employees the right to sue their employer for being fired if the employee is rude to his or her boss or co-workers, is chronically late or is hostile to his or her boss. In a press release by the Libertarian Party,

• “The ADA has become a multi-million dollar bonanza for lawyers. The ADA has been cited in lawsuits against a company that fired a dentist for fondling his patients, against a company for firing an employee caught falsifying records, against an employer for not banning perfume and against the New York City Transit Authority because a subway driver couldn’t fit into the driver’s seat.”

Re-Classification Of Independent Contractors May Entail Pension Costs

If an employer treats someone as an independent contractor and the IRS later finds the ‘contractor’ was an employee, the costs may be greater than just paying some back taxes and interest. In a recent comment posed in a legal discussion group on the Internet, it seems that some independent contractors who are re-classified are demanding full employee benefits, including back pension plan benefits.

Lawyers Weekly USA regularly reports on an assortment of sexual harassment cases in addition to many other civil lawsuits. Their 9/22/97 issue included a summary of a case in which a company lost a suit in which an employee who claimed to have been harassed informed her immediate superior, but the superior didn’t bring the complaint to the attention of any higher level superiors. The moral of this case seems to be that employees and front line supervisors or managers need to have some very clear method for bypassing normal communication channels about such matters. (The citation is U.S. Court of Appeals, 7th Circuit, Young v. Bayer Corp., No 96-3700, Sept. 5, 1997) 

In another case reported by LW USA, “a worker at a group home for the mentally retarded was sexually harassed by a resident”. The Eighth Circuit said she could sue her employer. The moral of that case seems to be that the employer didn’t make a sufficient effort to protect their workers from their residents. (The citation is U.S. Court of Appeals,, 8th Circuit, Crist v. Focus Homes, Inc., No. 96-406, 8/15/97.) 

The same issue of LW USA reported on a third case in which a male worker sued his employer because of being sexually harassed by a male heterosexual boss. I guess the moral of this case is that sexual harassment isn’t limited to males who are bothering females at work. (The citation is Cunningham v. Koehnen, MN S. Ct., No. C6-96-1118, 8/28/97.) 

Meanwhile, LW USA also reported on a case where an employee, who was fired after he admitted (in a deposition) that he may have harassed a co-worker, successfully sued his employer for “retaliation”. According to LW USA, “the plaintiff claimed that he wasn’t fired for engaging in harassment; he was fired because he got the company in trouble by telling the truth.” The moral of this case seems to be “Damned if you do. Damned if you don’t”. (The citation for this case is Merritt v. Dillard Paper Co., U.S. CA, 11 Circuit, No. 96-6247, August 29, 1997.) 

To order reprints of  these cases call Lawyers Weekly USA at 800-933-5594. 

Meanwhile, Research Recommendations, (8/25/97) reported on a bizarre case where seven white police officers sued their city because their supervisor made sexist, racist remarks to female and black officers. The white officers sued on the grounds that the supervisor’s comments created a hostile work environment. (Childress v. City of Richmond, No. 96-1585) 

Unless you work by yourself, your business could be at risk from a sexual harassment lawsuit. To protect your company, I suggest that you get a copy of the Employers’ Guide to Preventing Sexual Harassment, for $33.45 (shipping included) from National Institute of Business Management, PO Box 9070, MacLean, VA 22102-0070. 

Without denying that many employees are seriously threatened by other workers, the law is encouraging employees to look for opportunities to “hit the jackpot” with a large lawsuit judgment. No matter how hard you might try to create a non-threatening work environment, there will always be some employees who are overly aggressive with sexual advances and other employees who may be looking for the slightest provocation as an excuse to sue their employer.

If you are involved in the management of any tax exempt organization, you need to get informed about some new rules in the Taxpayer Bill of Rights 2 that became law last July 30th. As part of the revenue raising section of the law, this law created a new set of problems for the people who volunteer to serve on the board or who work part time in a management capacity. Scott Blakesley, our editorial advisor on charitable matters, pointed out that “These new rules will also impact those who work full time for the charities and who have any management authority with respect to the charities.” 

For many years, the people who administer private foundations have been subject to a variety of penalties and excise taxes on prohibited transactions. These rules did not previously apply to public charities. Instead, when a publicly supported charity was found to engage in similar self dealing transactions, the only option available to the IRS was to remove the entity’s exempt status. To cure that problem, the IRS convinced the Congress to apply similar penalty rules on any self dealing transactions between any “disqualified person” and the charity. 

The Commerce Clearing House explanation of this law states, “Penalty excise taxes may now be imposed as an intermediate sanction when a Code Section 501(c)(3) or 501(c)(4) organization engages in an ‘excess benefit transaction’. These excise taxes are imposed on ‘disqualified persons’ who improperly benefit from the transactions and on organization managers who knowingly participate in the transactions.” [Taxpayer Bill of Rights 2; Law and Explanation, Commerce Clearing House, 1-800-835-5224] 

A “disqualified person” includes any person who is in a position to exercise substantial authority over an organization’s affairs, regardless of their official title. Generally, that would include directors, officers or trustees, members of their families and any entities in which they own a 35% or greater interest - for up to five years after the alleged excess benefit transaction occurs. 

For this purpose, an “excess benefit transaction” is any transaction in which the value of the economic benefits (consideration) received by the charity are not equal to the value of the benefits given. According to an article in the January, 1997 Journal of Accountancy by Arthur Cassill and Susan Anderson, “If a charity gives its directors (or other person with substantial authority) a compensation package greater than that of directors of charities of comparable size, the director will be subject to a penalty tax ...(and) any of the charity’s managers who agreed to the package knowing it was excessive will also be subject to penalty taxes.” 

Scott also suggested that I mention that “..an excess benefit transaction includes any situation where the disqualified person is receiving a benefit which is based on amounts the charity if receiving for certain activities. For example, the person was being paid an amount equal to 5% of the charity’s net receipts for the year. I’m not yet sure exactly how this provision will be applied, but it is probably worth noting in your newsletter.” 

If your charity hasn’t looked into this yet, this would probably be a good time to start. You should begin with IRC Section 4958. Some background on this matter would be in the 1996 Taxpayer Bill of Rights 2. Your exempt organization tax advisor should be able to get you the details. If you need help from a specialist, you might want to contact Scott Blakesley, our Editorial Advisor on exempt organizations and planned giving.

Bill Comer recently sent me a copy of a 1996 case in which the Sixth Circuit Court of Appeals overruled a district court in a case involving the state law relating to a spendthrift trust and the federal law relating to a tax lien. [Bank One Ohio Trust Company vs. U.S., CA-6, 94-3974, 4/4/96] For me this case is a reminder that when the “Feds” want your money, there’s hardly any protection available in any form of U.S. entity. 

Frank Reitelbach’s father established a trust for Frank with a spendthrift trust provision that prohibits any trust income from being used to satisfy any debts of the beneficiary and from being assigned by the beneficiary to any other party. The IRS levied Bank One (as trustee) for the income that was otherwise payable to Frank. Bank One appealed and the Circuit Court held in their favor. The IRS appealed that decision and the Sixth Circuit Court of Appeals held for the IRS. Basically, the Appeals court found that state law was not binding on federal tax liens. So, in the US, a spendthrift irrevocable trust might protect the income and assets in the trust from any legal predators other than the Federal folks. So, if you are more concerned about losing your money to your government than to some future judgment creditor, your best bet is to get the money offshore in a jurisdiction that won’t cave in when the feds come calling.

One of the more obscure provisions of the Health Insurance Portability and Accountability Act of 1996 was the establishment of penalties to be imposed on anyone who aids in structuring the financial affairs of a Medicaid recipient so that they are eligible for Medicaid. The subject came up in a discussion group of planned giving consultants on the Internet and Stephen Gill, Esq. contributed a copy of the exact statute for the edification of the email forum. With his permission, here is a copy of what he posted to the Internet about this new law. 

“I've had a number of requests for the full, unedited text of the statute, so here it is (below). One person wrote privately that "the penalty provision of the statute does not address the added provision -- in other words, there is no fine or imprisonment specified for a person who transfers assets impermissibly. However, the 'catchall' penalty for anyone who violates any provision of section 1320a-7b is that DSS may deem an individual ineligible for assistance for up to one year." In reading the statute, however, I do not see the distinction, since it seems to me the statute is rather clear on the penalties.” Here is the full text: 

"Section 1320-7b - Criminal penalties for acts involving Medicare or state health care programs (a) MAKING OR CAUSING TO BE MADE FALSE STATEMENTS OR REPRESENTATIONS

“Whoever - (6) Knowingly and willfully disposes of assets (including by any transfer in trust) in order for an individual to become eligible for medical assistance under a state plan under Title XIX, if disposing of the assets results in the imposition of a period of ineligibility for such assistance under section 1917(c) shall (i) in the case of a statement, representation, concealment, failure or conversion by any person in connection with the furnishing (by that person) of items or services for which payment is or may be made under the program, be guilty of a felony and upon conviction thereof fined not more than $25,000 or imprisoned not more than five years or both, or (ii) in the case of such a statement, representation, concealment, failure or conversion by any other person, be guilty of a misdemeanor and upon conviction thereof fined not more than $10,000 or imprisoned for not more than one year, or both. In addition, in any case where an individual who is otherwise eligible for assistance under a state plan approved under subchapter XIX of this chapter is convicted of an offense under the preceding provisions of this subsection, the state may at its option (notwithstanding any other provision of that subchapter or of such plan) limit, restrict, or suspend the eligibility of that individual for such period (but not exceeding one year) as it deems appropriate; but the imposition of a limitation, restriction, or suspension with respect to eligibility of any individual under this sentence shall not affect the eligibility of any other person for assistance under the plan, regardless of the relationship between that individual and such other person." [Statute contributed by Stephen C. Nill, Esq. Rancho Santa Margarita, CA SCNisHere@aol.com)] 

As I read and re-read that statute, I came up with a host of questions as to it’s meaning. It makes many of the more obscure sections of the tax code seem simple by comparison. However, an article in the Nov./Dec. issue of the Ernst & Young Financial Planning Reporter states that “Beginning January 1, 1997, offenders could be subject to five years in prison and/or a $25,000 fine for knowingly and willingly disposing of their assets to gain Medicaid benefits.” E & Y also states that “Loopholes by which seniors may ‘reposition’ assets do exist, however and some will be unaffected by the new law". If I encounter any better explanation, I’ll pass on whatever I find out in a future issue of APS. At the least, I would urge some caution before getting involved in helping a relative (or a client) to become eligible for Medicaid by disposing of their assets.

Update:  Although this law has not been rescinded, it is not being enforced at this time.

Further details about protecting your assets from future lawsuits  are available in our subscriber's web site. 



NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.

About the author:

Vernon Jacobs is a CPA who works as a tax author and consultant.  He can be reached by phone at (913) 362-9667.

Web www.offshorepress.com www.vernonjacobs.com www.positivelights.org

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