With the economy still in recovery and business owners attempting to cover their losses, how can you devise an asset protection and estate plan that will work for you? An asset protection and estate plan is designed to keep your assets safe from the claims of potential creditors and preserve them for you and your family. Even individuals who are not employed in high-risk professions should engage in basic planning techniques.
The most important aspect is to plan early and to do it right. Protection planning is most effective when the planning occurs well before winds of trouble start to blow.
Insurance—Your First Line of Defense
The simplest way for a business owner to cope with risk and protect his or her assets is to shift the risk to an insurance company. So before you do anything else, you should contact your insurance agent to determine if you have an adequate amount of coverage. This coverage would be in addition to any professional liability insurance you may also carry, e.g., lawyers, doctors and accountants generally carry malpractice insurance, and directors of for-profit and not-for-profit companies carry director’s insurance. Increasing insurance premiums may prompt you to lower your coverage to a minimum. Still, for the dollars expended, insurance can be one of the cheapest and best forms of asset protection. Finally, verify the insurance policies name both the business name and your personal name, if possible.
Federal and/or state law exempts certain assets from creditors (called “exempt assets”). Another fairly simple component of an asset protection and estate plan is to build up the value of exempt assets, such as retirement plans (like certain 401(k) plans and qualifying IRAs) and homestead property. Utah’s homestead statute, for example, protects up to $40,000 of home equity for married couples and $20,000 for single individuals. But there are some exceptions to contributions made within the most recent year, which means once you learn of creditor trouble you can’t simply throw all your money into an exempt asset and be protected. Instead, you’ll need to determine what those exceptions and limitations are before developing an asset protection plan.
Transfers to Others
Corporations, limited liability companies (LLCs) and limited partnerships (LPs) are business entities that were created for asset protection and estate planning purposes. While most sophisticated business owners already operate their primary business through a proper entity, it is equally important that any side business ventures are also appropriately structured. For example, when real estate was booming, many business owners ventured into real property investment but failed to properly incorporate their real estate ventures, exposing their personal assets to great risk.
Today, entrepreneurs are purchasing rental properties at deep discounts, but they should be careful to properly structure the ownership of the properties to ensure adequate asset protection. Moreover, even if your rental business is incorporated, you should ensure that each property is held in its own entity to limit liability. Otherwise, for example, if a tenant falls and is injured at one property, the claim will be against that entity only, rather than the five other properties you own. In this way you can protect claims against you personally, while also isolating claims from one rental property, or entity, from the other properties and entities.
In addition to using regular business entities, domestic and offshore protection trusts offer more sophisticated protections. These trusts are subject to very strict statutory requirements, with Utah being one of the few states that allow such trusts. Setting up such a trust requires that you surrender significant control of the asset in exchange for significant protection. Moreover, creating and funding these entities and trusts is most effective when the planning is done well before there is a threat of a creditor claim or lawsuit. This is because creditors can undo transfers that occur around the same time as the events giving rise to the liability. Planning early is critical to an effective plan.
Finally, if you have high exposure to potential liability because of your business, you may want to consider shifting some assets to your spouse’s name.
Business owners spend a lifetime acquiring their wealth. In addition to protecting your wealth while you earn it, it is therefore equally important to execute proper estate planning documents to ensure that wealth is preserved for you and your family for the long haul. Properly executed wills, trusts, healthcare directives and powers of attorney can provide the peace of mind that a business owner needs to ensure not only the business is adequately protected, but also that the most important assets—the family—are taken care of. A will and trust is essential if you want to designate guardians for your minor children, provide asset management for young beneficiaries, and avoid court-appointed conservatorship and probate upon your death. Moreover, preparing an asset protection plan in conjunction with your estate plan lends more credence to your plan overall.
Having both an asset protection and estate plan is less complicated than you might think. Every business owner should evaluate their current circumstance and put in place appropriate protections to protect and preserve his or her hard-earned business and wealth.
Jennifer Decker is an attorney with Fabian Law. For over the last 10 years, she has practiced primarily in the areas of trusts and estate planning. She can be reached at (801) 323-2288 or firstname.lastname@example.org