Risk Management
|
Copyright 1992, 2002 - Thomas J. Keating, IV, All Rights Reserved
|
 |
Now that you've got it (personal wealth, that is) what should
you do, if anything, to try to protect it against the claims
of possible future creditors? This is one of life's problems
that very much depends on "the eye of the beholder".
Everyone's perception of and tolerance for risk is different,
and what might be a matter of utter indifference to one person
could be a huge anxiety to another. People run the entire
gamut from Pollyanna to Paranoid, and occupy just about every
incremental niche in between, so designing a risk management
strategy is, to say the very least, a highly personalized
undertaking.
1. What is a Creditor?
First, let's talk about the potential creditors, who come in
various forms, so we can all have an equally clear notion of
who they may be and what risks they may present.
At the lower end of the food chain, riskiness-wise, is someone
who has lent you money (e.g. a credit-card issuer, bank,
mortgage company, etc.) and has a right to get it back,
generally with interest, at some future time. Typically,
although these relationships create risk, the risk is
quantifiable and the methods of avoiding it are very few,
probably only bankruptcy, which may be a cure worse than the
disease.
At the upper end of the scale is the judgment creditor ---
someone who has sued you for some real or imagined harm
done by you to him, and has found a judge or jury who agrees
with him. These are the difficult ones to deal with in risk
prediction, as both their very existence, as well as the
exact nature, strength and amount of their claims, are
invariably unknown at the time the risk management exercise
is undertaken. It is the risk presented by the prospective
judgment creditor that we are primarily concerned with in
this discussion.
2. Defensive Strategies.
It will not surprise you to learn that there are some
defensive strategies that can be quite useful, nor will it
surprise you that some of those are often more trouble than
they are worth. This brief essay will simply touch on a
handful of the more obvious ones (and perhaps one or two
which are not so obvious) and possibly give you the impetus
to discuss with your various professional advisors what, if
anything, you yourself should consider doing along these
lines.
The strategies are listed in two separate categories, the
first relating to persons who have no active trade or
business interest, and the second relating to protection
of business entities (and their owners). These lists are
unavoidably generic, and do not attempt to identify all
conceivable defensive tactics, nor do they indicate any
method of prioritizing or selecting among the various possible
tactics.
A. Strategies for Non-Business
Owners. The following list touches briefly on
some ideas which may be useful to the non-business owners:
| A-1. |
|
Consider holding substantial personal net worth under
certain types of trust arrangements, possibly in another
country. These are generically called "asset protection
trusts" and come in many shapes and sizes. There are
significant risks and expenses involved, and a large
question of "comfort level", but in some circumstances
it can make sense.
|
|
| A-2. |
|
Shun any form of economic or personal activity which
produces risk which is not reasonably proportional to
the anticipated reward. In other words, do not take
any risk unless you are well paid for it.
|
|
| A-3. |
|
Consider holding a significant portion of your assets
jointly with your spouse, as tenants by the
entireties, and/or in one or more irrevocable trusts
for benefit of your spouse and children.
|
|
| A-4. |
|
Where appropriate, consider entering into an
ante-nuptial or post-nuptial agreement to regulate
your exposure to the untoward economic consequences
of the dissolution of your marriage.
|
|
| A-5. |
|
If the laws of your jurisdiction (or of another
jurisdiction to which you might relocate) exempt
certain types of assets from the claims of creditors,
consider switching some significant portion of your
capital into those sheltered types of assets. This
might be a cheap solution, but it does carry a risk
that the law will subsequently change and the
protection thus evaporate.
|
|
| A-6. |
|
Keep a wary eye on legal hazards originating with
government policy and/or governmental action. An
example of this would be a federal law imposing a
forfeiture of assets which were used in the
commission of a crime, even though the owner was
unaware of such use.
|
|
| A-7. |
|
If you have a great deal to protect, and also have
some charitable or philanthropic instincts, you might
wish to investigate the myriad forms of charitable
giving, including, most importantly, the private
foundation. For reasons of discretion I will say no
more here, but quiz your advisors thoroughly about
how this might benefit you.
|
|
| A-8. |
|
Make sure your normal liability insurance policies
(e.g. automobile, homeowners, etc.) cover you to
appropriate levels, that there are no undesirable
exclusions from coverage, and that you have in place
a substantial "umbrella" policy that is accurately
tailored to mesh with your other coverages.
|
B. Strategies for Business Owners.
This list touches on ideas for the owners and/or managers of
business interests:
| B-1. |
|
Always own and operate any business interest in some
suitable form of liability-limiting business entity
(e.g. corporation, limited liability company, limited
liability partnership), and not as a sole
proprietorship or in a conventional general
partnership.
|
|
| B-2. |
|
Consider holding different business interests (or
perhaps even different aspects of the same business,
if it is a high-risk situation) in separate entities,
preferably with each one having somewhat different
ownership and management. Also consider holding the
business assets in one entity and conducting the
business operations through another.
|
|
| B-3. |
|
Regarding business operations, (a) prepare and
utilize an appropriate employee handbook, (b) design
and implement an effective worker safety program,
(c) resist oral agreements, and (d) do not personally
guarantee the financial obligations of the business.
|
|
| B-4. |
|
Wherever possible in commercial transactions, issue
disclaimers and/or procure releases from (or at least
limitations of) liability. Careful; this is more
difficult than it sounds, and specialist advice is
clearly in order if much rests on this technique.
|
|
| B-5. |
|
Where neither disclaimers nor releases seem
achievable, consider techniques which may later
enable you to establish that there had been an
assumption of risk by the other side. There are a
number of ways to skin this particular cat!
|
|
| B-6. |
|
Consider engaging a qualified general manager for the
business, to attempt to insulate yourself from
personal involvement in daily operational decisions
and any legal risks which may flow therefrom.
|
|
| B-7. |
|
If you are a director or officer of a business entity,
consider (a) causing the entity to put in place a
policy providing for indemnification of directors and
officers by the entity, and (b) causing the entity to
purchase directors and officers liability insurance.
Be careful, however, to see that such insurance will
really do what you expect it to do.
|
|
| B-8. |
|
There are certain actions or omissions on the part
of the manager of a business that can give rise to
criminal prosecution and/or to personal liability for
fines and/or penalties. Particulars are not in order
here, as this is an ever-changing scene; simply
realize that conducting your business through a
"limited liability" entity will not shield you from
these specific types of risks.
|
There are wide differences in the effectiveness of these
techniques, the costs of implementation, the personal
flexibility which may have to be sacrificed, and their
usefulness in specific factual situations. No one of them,
standing alone, is apt to do the complete job, and only a
confirmed paranoiac would trouble himself to employ more than
a few. The trick here, as in most such decisions, is to
match the tool to the task, which requires both a pretty good
knowledge of the tool, both its strengths and its weaknesses,
and some predictive accuracy regarding the tasks with which
the tool may be confronted.
3. What are the Costs?
Like most anything else you can name, risk avoidance is not
free, and the types of costs associated with it fall generally
into four categories:
- Initial costs, such as, but not necessarily limited to,
professional fees (e.g. legal, accounting, consulting)
to design and implement a suitable risk management plan.
- Ongoing periodic costs, the most obvious examples of
which would be insurance premiums, trustees' commissions,
legal and accounting costs for managing multiple
business entities, etc.
- Opportunity costs, such as, for example, (a) eschewing
potentially profitable but also exceptionally risky
business activities, and (b) perhaps less obviously,
making planning choices which effectively preclude your
making certain other, and possibly better, choices.
- Costs of error, which are losses resulting from (a)
techniques which were tried but which, for some reason,
failed, or (b) techniques which might have well have
worked but which, for some reason, were not implemented.
Of these categories, the first three are far more susceptible
of prediction; it is the latter category which is the true
imponderable here.
The costs of planning and implementing an asset protection
strategy are, as you will have already guessed, wildly
variable, and depend on the nature and severity of the risk,
the amount of capital to be protected, the techniques which
are chosen, and the amount of ongoing professional attention
required.
4. The Perils of Peregrination.
If you are deeply rooted in one place, all you have to
consider is the law in that place, or, if you are especially
forward-thinking; how that law might be expected to change
over the years. If, however, you expect to live in many
places during your remaining lifetime, a state-law specific
program may be less useful, or could even be dangerous, as
decisions taken while residing in one place may not prove
adaptable to other circumstances.
5. The Tool of Insurance.
For the sophisticated person, insurance can be used to
mitigate all sorts of risks --- the great problem is to
sensibly match the premium expense to the actual protective
value of the device being selected. Insurance is a massively
un-understood commodity --- I do not believe even as many as
one percent of the owners of insurance policies have an
accurate understanding of what they have purchased. This
figure drops even lower when considering the more arcane and
complex types of policy, such as those typically purchased by
businesses.
Most insurance buyers, to the extent that, in this electronic
age, they rely on any human advisor at all, look to their
local "Agent", who is a representative of one, or at most a
very few, insurance companies. For this reason, the agent's
inclination will be to fit the buyer up to something he has
in stock rather than to knowledgeably survey the entire
situation and seek out an optimum solution.
For this reason, you might consider engaging an independent
insurance consultant (someone other than your regular agent),
to work for you on a fee-for-service basis, to (a) assess your
risk profile, (b) investigate what insurance coverages are
available, (c) define and prioritize the coverages that may be
desirable, (e) evaluate costs versus benefits, (f) review
specimen policies, (g) prepare bid specifications, etc. It is
well known in the industry that some insurers are dramatically
better (from the insured's viewpoint) at settling claims than
are others, and a knowledgeable and disinterested advisor can
identify these more desirable insurers for you.
A final cautionary remark about insurance generally. Ambrose
Bierce defined the term in his "Devil's Dictionary" as "An
ingenious modern game of chance in which the player is
permitted to enjoy the comfortable conviction that he is
beating the man who keeps the table". Those of us whose
experience has allowed them to see the insurance industry in
action over a long period will ruefully acknowledge the
accuracy of this characterization. Make insurance your last
line of defense, not your first, as you may find it less
potent a weapon than you expected it to be.
6. A Plea for Prophylaxis.
Human nature being what it is, not many of us spend much time
or money worrying about problems which have not yet arisen.
The very clever few, however, do worry about them, and seek
qualified advice as to (a) how to reduce the likelihood of
such problems arising, and (b) how to reduce the impact of
such problems if they do arise. Simply put, it is just good
business to reduce the risks associated with foreseeable
adverse events, and legal time and talent which is employed
in a prophylactic mode is far more cost-effective than the
same time and talent utilized in a therapeutic or palliative
mode. The cost of dealing with one lawsuit would finance
literally years of legal preventive maintenance for the
typical individual or small business. Wise up, buck the
trend, be one of the few.
7. Folk Wisdom Department.
If you are in business, or are considering being in business,
with another person, you'd best be damned sure of that
person's sense of honor --- a dishonorable business partner
can get you into scrapes that are literally beyond your
imagining. In this connection, you would do well to bear in
mind one of my favorite folk sayings, which goes as follows:
When a Man with Money
Meets up with a Man with Experience
The Man with the Experience gets the Money
and the Man with the Money gets an Experience!
8. A Special Warning.
A particular warning is in order, I fear, for any well-to-do
person who did not get where he is through his own talents
and efforts. There are people out there, sadly, who look at
you as a sheep to be shorn, and who will seek to take
advantage if they think there is any chance of getting away
with it. The stages on which this brand of chicanery are
played out are many and various, and can touch literally every
part of your life. Your best weapon will be a well-developed
sense of skepticism (which works only if you keep it strictly
to yourself), and the capacity to say no in a way which,
although giving no offense, makes it plain that you are not
one to be trifled with.
I have long believed that the wealthy Asians and Europeans are
well ahead of the Americans in coping with this aspect of
life, as they are much less likely to advertise their good
fortune and hence less apt to attract the attentions of the
predatory classes. Modesty about money is not a noticeable
quality in our country, and opportunities thus abound for
those who are so inclined.
The great trick here, and not many will master it, is to
develop and use these protective skills and yet retain a
balanced view of human nature. So many who live life
"on guard" become, I suppose understandably, quite jaundiced
and even misanthropic, which is a sad price to pay. Guarding
one's material wealth only at the sacrifice of one's spirit.
What a devil's bargain that is!
9. Additional Reading.
If you want to read more on this subject, get yourself to a
good library or bookseller and browse in the subject areas
of "risk management" and "asset protection". I could do this
for you, of course, but there's no reason to . . . you can
surpass my knowledge of this subject in an embarrassingly
short time; why would I want to do anything to make it even
shorter?
|
Next Page
Table of Contents
Law Offices of Thomas J. Keating IV
Centreville, Maryland, USA
|
About the Site |
Home Truths |
Bibliography
Food for Thought |
Random Thoughts |
Front Page
Copyright © 1998-2002, Thomas J. Keating IV
Web site by BIS.
|