Small Business Financial Article
|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Asset Protection: 5 Things You Probably Haven't Considered
Business owners who have acquired a lot of personal assets face the possibility of having their assets targeted by creditors who want to resolve a business liability. This is especially true in the case of a business owner who guarantees a debt of the business with his personal assets. Although many business owners go through the process of protecting their assets from business liabilities, there are some aspects of asset protection that they may not have considered which could put their assets at risk.
Legitimate Asset Protection versus Tax Avoidance
If you have ever Googled “Asset Protection” there is good chance your search returned dozens of ads and sites that profess to specialize in asset protection strategies. Upon closer review you will most likely find that most of them are offering up a magic bullet which consists of some off shore haven to serve as a resting place for your assets. These “solutions” should be approached with caution. Although there is not a lot of case law specifically centered on asset protection as a viable strategy, there are many cases that have targeted people who have used off shore accounts and other methods purely as a tax avoidance scheme, and they often come out as losers.
Legitimate asset protection strategies do involve methods for moving assets out of the reach of creditors; however, the tax implications need to be a minor aspect of the strategy. Also, if it is found that assets were moved in an attempt to defraud a creditor, there is plenty of case law to support the plaintiff.
Using Insurance to Avoid Creditor Litigation
A legitimate asset protection planner will recommend that, among the first strategies to employ, the business owner should purchase the biggest general liability insurance policy he possibly can. Their contention is that the policy will act as a diversion from personal assets as litigants are more apt to follow the deep pockets of an insurance company and avoid the cost and time of litigation.
They Can’t Get What You Don’t Own
Among the basic principles of asset protection planning is the transfer of assets in a way that insulates the business owner from ownership while enabling them to maintain control. Many of the strategies discussed here serve to do just that. One of the most basic tools to accomplish this is the Irrevocable Trust. An irrevocable trust is an arrangement whereby a trustee is assigned ownership of an asset such as real property or even the business. Once transferred, these assets no longer have to be included on the financial statement of the business owner. It is important to transfer assets well before problems emerge to avoid any contemplation of fraud.
Utilizing Basic Estate Planning Tools
A basic estate planning tool offers what might be the ultimate solution for married couples where only one of the spouses has an interest in the business. Each spouse is allowed an unlimited exemption on the transfer of assets between each other. In order to maximize the exemption for the whole estate, couples can set up a Unified Credit Trust which is designed to hold the assets of the deceased spouse. In the case of the business owner, the business interest can retained by him or her while an equal amount of personal assets are transferred to the portion of the trust to be held by the spouse. This estate planning technique has held up in case law as a way to remove the business owner from the ownership of the business.
Not all LLCs are Alike
LLCs have risen to prominence as a legitimate way to insulate the business owner from business liabilities. Business owners have been using LLCs to provide protection against a claim against their company for years. However, should a claim be brought against a business owner’s interest in the LLC, they may not have the protection they thought.
Only a hand full of states, such as Nevada and Alaska allow the formation of an LLC that will actually provide protection against a creditor that wants to seize the ownership of the business owners’ interest in the LLC.
State law provides that the interests of an LLC are governed by the state in which the LLC was formed regardless of where the business is located. If the state in which your LLC is formed does not provide the extra protection of individual interests within the LLC, you may want to consider, along with your business attorney, a change in your LLC residency.
Any consideration of an asset planning strategy should be done in consultation with a qualified attorney with case law experience in asset protection and taxation.