Legal threats to wealth do not apply only to the wealthiest top 1% of US taxpayers. Rather, they also should concern middle and upper-middle classes of the United States, especially doctors, lawyers, small and mid-size business owners, professionals (self-employed and employed within by companies), high-salaried employees, corporate officers, high-net-worth families and investors.
In this article, I would like to discuss the common legal threats to wealth, whether it was earned or inherited. For the purposes of this writing, “legal threats” mean the threats stemming from various litigation theories, divorce and death.
1. Legal Threats to Wealth: Contract Claims
One of the most common threat to wealth comes from contract litigation. In these cases, a plaintiff would usually assert that the defendant failed to perform under a contract and ask for compensatory, punitive, statutory and/or exemplary damages. In addition to failure to perform under a contract, claims may be asserted with respect to debts, guarantees, contingent liabilities and joint and several partnership obligations.
The contract claim risks can be very hard to anticipate because of the surprising reach of the contract exposure (for example, a judge may interpret a guaranty far beyond its intended scope or grant huge damages to a defendant).
2. Legal Threats to Wealth: Extension of Corporate Liability to Officers and Directors
One of the most dangerous legal threats to wealth is in the trend to hold corporate Officers and Directors liable for the actions or inactions of their employer-corporation. These threats can come from the government and from the private sector.
3. Legal Threats to Wealth: Tort Litigation
The incessant growth in tort litigation is a primary concern for anyone involved in a medical profession, but it also should worry individuals in other fields. It is generally agreed that the United States is the most litigious society in the world and the risk of being sued should always be taken into account.
One of the new legal threats to wealth comes from interspousal tort liability claims – i.e. intentional infliction of emotional distress by one spouse on another. In some cases, these claims can even successfully circumvent premarital agreements.
4. Legal Threats to Wealth: Partnership Obligations
I already alluded to this threat in my discussion of joint and several liability for partners in a partnership. Here, we can also add the appearance of new partners without consent through litigation.
5. Legal Threats to Wealth: Environmental and Other Regulatory Liability
A newer set of threats to wealth comes from various US regulations, particularly the US environmental regulations (such as Comprehensive Environmental Response, Compensation and Liability Act or “CERCLA”) which makes individuals liable for environmental hazards on the land that they own irrespective of whether the present owners created the hazard or bought the land knowing that there was one. The liability can also be shared by former landowners and even officers and directors of a corporate owner (as long as they had “substantial control” over the land).
6. Legal Threats to Wealth: Divorce
The concerns over the division of property during a divorce have grown into one of the most serious threats to wealth. The threat is so critical that it has become a factor in many peoples’ preference for choosing co-living rather than a marriage.
The reason why this problem has become so serious is that, in most US tax jurisdictions, the understandable desire to protect a non-working spouse has grown to the almost automatic fifty-fifty division of property no matter how such property was brought into the marriage and how inequitable such division could be. Moreover, the attempts by lawyers to mitigate this problem though premarital and marital arrangements are often completely overturned by the judges, even in situations where such arrangements seek to protect the children’s inheritance.
7. Legal Threats to Wealth: Compulsory Dispositions
The last common legal threat to wealth that I wish to mention in this article is a forced disposition, usually upon termination of marriage or death. In a civil law system, this threat is usually materialized in the form of “forced heirs”. Dower and curtesy rights exemplify the threat of a compulsory disposition in common law jurisdictions.
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