METARites hang around here attempting to understand and gain insight into Macro Economic factors that will influence the returns on different asset classes. All fine and good to allocate your assets into the correct classes before the crowd figures it out.What I do NOT recall seeing is how to preserve those assets under adverse conditions. You are thinking: “Yoda is going to offer up some prophetic advice on how to avoid market downturns.” I very well might do that, but that is NOT what this post is about.Some of you might have read my post about the “black swan” that landed recently at the Yoda cave. It involved me being personally sued due to owning a stock on the date it was bought out. Previous to that, I thought I had better odds of winning the mega lottery instead of being sued for this reason. Suffice to say, I had no downside protection for that event. Previous post on Own a Stock and get sued:http://boards.fool.com/own-a-stock-and-get-sued-29924569.asp...Today’s post is about outside risks other than investments. These are the white swans that appear often at the doorsteps of affluent folks. Affluent in this case does not necessarily mean millions or tens of millions net worth. For purposes of this post, let’s stipulate that affluent means having a net worth of >= $100,000.The risk that affluent folks have is litigation risk. If something goes wrong or someone alleges that something has gone wrong, affluent folks can and will be targeted for remuneration. Simple cases are either automobile accidents or household accidents. Most states require all drivers to have automobile liability insurance. The laws vary by state, but you might be legally required to have a minimum of $100k in liability insurance. So you have an automobile accident where someone is injured/killed and you are ruled liable. Your insurance company writes a $100k check to the victim and you think you are done. If you are affluent, you are NOT done. All of your financial assets outside of IRA/401k’s are at risk. If you have say $100k or $1 million or $10 million in financial assets, they will be at risk. The lawyer representing the victim will quickly figure this out and seek to get all/part of your investment portfolio.In most states, your personal residence is not at risk, even if you own it outright (mortgage free). But you should check your own state to verify if this is the case or not.Your 401K/403B account is ruled by federal law and is NOT attackable.Here is where it gets interesting. IRA’s are attackable in some states. State law dictates this. For example, they are attackable in California. Many affluent folks thought they were well protected because they had most of their assets held in an IRA, only to have a judge reward a significant amount of them to the victim.There are two broad solutions to this risk:1) Have a low net worth. If you have little to no assets, it is not financially worthwhile for the victim to seek remuneration from you. Stated differently, you cannot get blood from a turnip. I do not recommend this solution.2) Carry an “umbrella liability” insurance policy. These policies kick in after your automobile and/or homeowner’s insurance policy has maxed out. There are several well regarded national insurance companies that offer these. Annual prices are on the order of about $500 to $1,000 for each million dollars of coverage. And the rates typically go down for each incremental million dollars of coverage. There is no exact formula to say how much coverage you should have. I suggest minimum coverage equal to your net worth or $ 1 million, whichever is greater. Even if you have this coverage, there is no guarantee that the victim will seek to recover the “policy limits” and then go after your financial assets. However, if you offer up $1 million or $2 million from your umbrella liability policy that often times will be sufficient.Once again, this is not a hypothetical story. There are many cases like this being filed every day. Usually they are against companies, because not many individuals have high enough net worth to make it worthwhile.BOTTOM LINE is you should strongly consider having umbrella liability coverage if you are affluent/have a high net worth. The cost is very reasonable, simply because the odds of you being sued are very low. Very low does NOT mean zero chance of being sued. This is a white swam IMO because lawsuits like this are filed all of the time. We will stipulate that this applies to most METARites due to having a successful investment strategy! All of the investment success will go to waste if you lose all of your assets in a lawsuit. Obviously, I am not recommending you adopt risky behavior that encourages these types of lawsuits simply because you have an umbrella policy.I will not go into details, but last week I was involved a situation that could have turned into a lawsuit like this. It only occurred to me after the fact that there was a potential liability there. You might not think about it in these terms, but you take this risk darn near every time you drive a car amongst other thingsThanks,Yodaorange
I'm not really high net worth, but I've carried an umbrella policy for years. Just in case.
Good advice, Yoda.I carry an umbrella liabilty policy for this very reason.Another thing a person can do to protect assets is to spread them around the world where they would be hard for a plaintiff to reach.Of course, you'd have to report them to Timmy Geithner and pay US taxes on any income or gains they produce.
Another good reason for an umbrella insurance policy: subdivisions w/ Homeowners' Associations. MDH is a trustee of our small (~25 homes) HOA (three year term). Each year there's always a few members who ask why we buy that policy and wouldn't we be better off saving the money. MDH then explains: 1) if there's an accident w/injuries due to a down tree limb; and 2) we don't have the policy, then each homeowner on the street could be held liable and sued.He just read me a snippet about the HOA of the subdivision in Florida w/ the Martin/Zimmermann shooting. It seems that the HOA can be sued, since they sponsored Zimmermann as head of their Neighborhood Watch program.There's hidden danger everywhere!PM
PolymerMom wrote: "Another good reason for an umbrella insurance policy: subdivisions w/ Homeowners' Associations."PM, I am not an insurance agent, but I am concerned about your umbrella polity. The reason I am not sure has to do with the difference between a Homeowners Association and a regular business.Assuming the HOA is the same as a business, which might be 100% invalid:1) If the umbrella policy was written for the HOA board, it is the wrong kind of policy. The policy you want is a "D & O" (directors and officers). This is the standard policy for companies with boards. Basically it protects the board members due to any decisions they make for the business. For example, when Angelo Mozillo settled his SEC lawsuit for $67.5 million, the majority of it was paid by the Countrywide bought D&O policy.2) If the umbrella policy is written for you and your husband personally, it absolutely, positively does NOT cover his activities on the HOA board. Personal umbrella policies are very clear that they do not cover outside business activities. For example, let's say someone has a part time plumbing business. The plumber is torching some lines together and catches a $4 million house on fire(a true story BTW). A personal umbrella would pay zero towards the burnt down house.Once again, I am not sure about the legal difference between a business and the HOA. The person you need to talk with is an experienced agent that writes commercial insurance, not personal insurance. He/she could tell you instantly if you have the write kind of coverage. I hope I am wrong about your situation. . . Good luck,Yoda
Today’s post is about outside risks other than investments. These are the white swans that appear often at the doorsteps of affluent folks. Affluent in this case does not necessarily mean millions or tens of millions net worth. For purposes of this post, let’s stipulate that affluent means having a net worth of >= $100,000.The risk that affluent folks have is litigation risk. If something goes wrong or someone alleges that something has gone wrong, affluent folks can and will be targeted for remuneration.That's one of the risks, but it's not the only one. Another risk is that one's spouse sells off all the stock in her retirement account, takes the money, and sends it to con men. Then she takes cash advances on joint credit cards in to order to send more and opens up new lines of credit and does the same. Then she borrows money from a "friend." Meanwhile, she is behind on some payments that are in your name and hers. That's a risk.culcha
Yoda,It's option 3: for the whole subdivision. The subdivision "owns" a private street and maintains the roadway, right-of-way, and all the trees and other "plant material" that is jointly owned by the HOA. The HOA pays the premium out of the dues that the residents pay for the "privilege" of living on the street.MDH had several iterations w/ the insurance agent before getting it set up properly. PM
culcha,Please see a lawyer if you haven't already done so!Best of luck,PM
Yoda's comments are about a topic that each of us should take to heart. I am not a big fan of insurance companies as they are always trying to make a profit at my expense. That said, in the vein of never putting one's self in a position to receive a knockout punch (finacially) insurance against all sorts of catastrophies should be strongly considered. As an example, in preparation for our next major trip, we are taking a variety of insurance policies from three different companies. There are significant gaps in the coverage in some cases (but generally, those are covered by other policies we carry), but some are far more comprehensive than those most people carry to cover what I deem as "show stoppers" (such as a flexible medevac program to get us out from some hell hole with a nearby "adequite" medical facility).For those who are professionals of one sort or another, Errors and Ommission insurance is something to consider.As Yoda points out, a substantial umbrella liability policy is certainly something each of us should seriously consider.For those with jewelry, but reluctant to spend the money to insure it, there are far lower cost policy riders available if it is generally kept in a bank's safe deposit box and only taken out for short periods over the year.Jeff
<Another risk is that one's spouse ...>Some elderly people can suffer subtle brain deterioration that can cause them to act in previously uncharacteristic ways. Younger people can also act unpredictably (just read "Dear Abby" for the many ways people go off the rails). This is rare but certainly a risk.In my opinion, both spouses should be aware of all financial transactions at all times. In the immortal words of Ronald Reagan, "Trust, but verify."Wendy
yodaA very important post. Let me elaborate a little. My wife has a small business of renting a summer cottage, and she has a limited liability corporation (LLC) covering the cottage. In theory she could only be sued for the value of the cottage if some tenant is hurt and sues. In fact we did have a friend break an ankle going down some rock steps at the cottage. Fortunately for us she blamed herself for wearing slip on wedgies.But as yoda points out, you can be sued for anything. They might not collect, but it could still cost you, maybe a lot in lawyers fees, etc.So yes, a ballon policy is valuable, and they don't cost much as yoda points out. Ours is for $2 million and costs something like $300/yr (I believe) with USAA. But USAA would only sell us a balloon policy if we had all our insurance with them (home owners, automobile, the cottage). We did not have to transfer life insurance to them.brucedoe
what about incorporating as a limited liability corp? I think that shields assets
You might not think about it in these terms, but you take this risk darn near every time you drive a car amongst other thingsYet another reason not to own a car :)
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