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Business Asset Protection Overview
 
 
Home Asset Protection Business Asset Protection Overview

Business Asset Protection Overview

Asset Protection is a method of arranging and organizing assets for protection against attacks from lawsuits, judgment liens and creditors. Asset protection involves many new concepts for you and your family.

1. Right Business Entity Choice

A professional practice or the business you own can be a magnet for litigation. Every patient, client, and customer can file a lawsuit that will can threaten your savings and assets that you have worked so hard to accumulate.

1.1. Limited Liability Company. Under most state laws, a Limited Liability Company (LLC) is generally a convenient and flexible business format. The LLC avoids many of the tax problems, double taxation and the maintenance expenses associated with corporations. Generally, the law protects the personal assets of the owners of the company from liability produced by the business.

1.2. Use LLC, Corporations and FLP. In most states, physicians and some other licensed professionals cannot shield themselves from liability with either an LLC or a corporation. In order to protect the family home and savings, an alternative route is needed. If you can't limit your personal exposure to claims, use a strategy such as a Family Limited Partnership (FLP), an LLC, or a trust, which will protect the assets themselves. That way, even though you can be sued-it won't be worthwhile for the plaintiff to do so.

1.3. Professional Practices. A professional practice that cannot be formed as an LLC should be incorporated. Although the corporation does not offer protection from malpractice claims, it can protect the owners personal assets from many other types of business risks. Generally, when you use a corporation, you are not responsible for corporate obligations unless you have given your personal guarantee.   In addition, you will be shielded from most types of claims from employees, suppliers, and landlords.

1.4. Corporation as a Partner. If you have other partners in your professional practice, you can limit your liability for claims arising from their negligence by separately incorporating your practice. Your corporation would be a partner with each of the other corporations and you would not be responsible for claims against the others.

1.5. S-Corporation. Since a corporation is a taxpaying entity, you will have to plan for eliminating a potential double tax on corporate earnings. This can be accomplished by using an S Corporation or by zeroing out corporate income through salaries to officers. To ensure that the corporation will be respected for legal and tax purposes, the corporate formalities of minutes, bylaws, and stock certificates must be observed. All of your dealings with third parties should be conducted in the corporate name, and a separate corporate bank account must be used.

2. Avoid Business Partnerships and General Partnerships

Never enter into a business partnership with anyone. General partnerships can produce unlimited liabilities for you which are totally unexpected and not your fault.  As a co-general partner you are responsible for all partnership debts and any negligent acts of your partners. A business partnership expands the scope of your personal liability when you should limiting your risks.

3. Never Give Personal Guarantee

A personal guarantee places all of your assets at the mercy of a particular business deal and you are undertaking a risk with odds much worse than those offered in most gambling casinos.

If you give a personal guarantee, then you will lose the protections of incorporating. Many of the problems which we see in our practice are caused directly by needless guarantees for corporate loans leases of unsuccessful business ventures.

3.1  Avoid Giving Personal Guarantees on a Lease. Generally, lenders or landlords may not require a personal guarantee if he or she can be persuaded that the business or proposed venture is sound. Today, lenders are anxious to make good loans, and landlords want to lease empty space. If you cannot convince them that your company is going to be successful and that they should rely solely on the business for payment, you should not enter into a deal with them.

4. Use Multiple Entities If You Have More Than One Type of Business

Use different entities to conduct each facet of the business. The goal is to protect each separate business from liabilities produced by the other activities of the other businesses.

Physicians operating more than one clinic should never hold ownership in a single entity. Similarly, if you own several real estate properties, use different entities to hold each one. If there is a lawsuit in connection with one of the properties, the others won’t be endangered. The same logic would be applied if you owned properties and also performed property management services for others. You would want to separate the management business from the ownership of the properties.

As a general principle, the ownership of an asset with a high risk of producing liability, should always be separated from Safe Assets, such as cash or securities. These Safe Assets should not be jeopardized by a liability associated with your business or other Dangerous (high risk) Assets which you own.

For example, a restaurant owner had substantial retirement savings in the bank. If he was sued because of a liability in connection with the restaurant, his retirement savings could be lost. Instead, merely by putting the restaurant in an LLC, we removed the Dangerous Asset from his legal ownership. Then, any lawsuit against the LLC, which owned the business, would not place his other assets at risk.

5. Estate Plan Avoids Probate

Without an estate plan, your assets, business, home, cash and savings can be frozen until the probate procedure has been completed. In many states, the probate procedure can take two or more years. In addition, the cost of probate can be very high.

5.1  Revocable Living Trust
Property in a trust is not subject to probate fees and delays. Trust assets pass instantly to designated family members. A revocable living trust is a popular format for avoiding probate and carrying out basic estate planning strategies.

5.2  Limited Term Trust
Property can be placed in trust for a designated term of years. The support or educational needs of a child or other family member can be satisfied from trust income or principal. Assets can be protected from potential claims during the period of the greatest liability. The property can be returned to you for retirement or other needs at a later period in your life-when you are no longer working and your liability concerns are diminished. One good strategy is to place FLP limited partnership interests in this type of trust.

5.3  Irrevocable Life Insurance Trust
Insurance is used to provide adequate funds for family living expenses; cash to meet business liquidity needs and necessary amounts to pay estate taxes-without a loss of accumulated savings. To avoid estate taxes of up to 55 percent on the insurance proceeds, a Life Insurance Trust must be used to hold the policy. Amounts transferred into this plan have the added advantage of building cash value free of income tax and fully protected from any lawsuits or claims against you.

5.4  Estate Freeze Trust
Investments that are likely to appreciate in value should be moved into the Estate Freeze Trust. Real estate, stocks, and ownership in a new business venture are often used to fund these trusts. Amounts up to the exemption amount can be transferred without gift tax. This amount plus future increases in value-perhaps millions of dollars-can escape taxation with the proper planning.

5.5  Personal Residence Trust
Your largest source of savings may be the equity in your home. A loss would be disastrous from an emotional as well as a financial standpoint. You need to protect your home-but at the same time preserve the tax benefits of the mortgage interest deduction and the ability to avoid gain on the sale. The Personal Residence Trust is an excellent technique for accomplishing asset protection without losing the unique tax advantages of home ownership.

5.6  Privacy Trust
Privacy for what you own may be an important issue to you. When others can easily locate your bank accounts and real estate, dangers are created. Lawsuits and claims against you are encouraged when you hold property in an accessible and unprotected form. A Privacy Trust can be created which will allow you to hold bank and brokerage accounts and real estate without revealing your ownership. You can control the information about yourself which is available to others. The Privacy Trust can be combined with a Family Limited Partnership or LLC to satisfy asset protection as well as privacy concerns.

5.7  Offshore or Asset Protection Trust
The Offshore or Asset Protection Trust (APT) acts as a safety valve-providing the ability to move funds into an overseas trust account-shielded by favorable asset protection and bank secrecy laws. The APT opens up the world of offshore planning opportunities for sophisticated individuals who are willing to bear some additional expense for the enhanced options which are presented. Because it provides great legal and practical flexibility, the APT is often an important component of a complete estate and asset protection plan.

6. Discourage Lawsuits

A Family Limited Partnership (FLP) will provide you with four significant advantages that cannot be obtained through any other vehicle. The first advantage is that the FLP can discourage lawsuits. Assets that are protected in the Family Limited Partnership cannot be seized by a judgment creditor. It is unlikely that someone will want to sue you if they do not believe that they will be able to collect a judgment.

7. Save Income Taxes

With state and federal combined tax rates of 50 percent, overall family income taxes may be reduced by shifting income to lower bracket family members. This can be accomplished by gifting some limited partnership interests to children or grandchildren who are fourteen years or older. Depending upon the number of beneficiaries and the amounts involved, over a period of years the total savings can be quite substantial.

Aggressive tax planning with the FLP often includes a nonprofit organization as a partner in the FLP. Properly designed, significant tax savings can be generated and overall family wealth can be increased with this structure.

8. Save Estate Taxes

Limited partnership interests that are transferred by gifting to children or other family members, will not be included in your estate for estate tax purposes. A small percentage could be transferred each year which would not be subject to gift tax under the annual exclusion of $12,000 per donee. Greater value, up the exemption amount, could be transferred for additional savings. The amount of the gift plus appreciation of the underlying assets would escape estate taxes. An estate of $2 million can grow to $15 million or $16 million-invested at 7 percent per year, for someone in their early or late 40s. Potential estate taxes of $8 million can be avoided-with no inconvenience or loss of control. Under current law, the value of the interests transferred will be discounted in value to account for the lack of marketability and control. Significant estate tax savings can be generated by taking advantage of this technique.

9. Protect Assets

The most valuable feature of the Family Limited Partnership is the ability to protect and shield assets from potential claims. The law is well-established that a creditor of a partner is not permitted to seize assets of the partnership to satisfy the debt. That means that business interests, savings, and investments may be safely insulated from potential liabilities in this manner. This excellent result will not be accomplished if a creditor is able to obtain a charging order, foreclosure or seizure of your ownership interests in the FLP. Limited Partnership interests should be held by children, or trusts specifically designed for ownership purposes. This technique will preserve and may significantly enhance the available level of asset protection.

 

 
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