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Preserving Your Assets



April 02, 2012 – Comments (0)

Board: Macro Economics

Author: yodaorange

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:

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 things



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