Asset Protection - Learn how to legally protect your assets from lawsuits, taxes, and foolish heirs.
We live in an increasingly litigious society in which asset protection has become a necessity for small business owners. They are a target - not only because they are out in the community actively making things happen, but also because they are perceived as having "deep pockets."
While it is certainly true that many of the plaintiffs in our court systems have been truly injured by the negligent or intentional actions of others, there are far too many claimants who look upon an accident as if they had hit the lottery. If the small business owner doesn't actively practice asset protection, he could lose everything he has worked for as the result of a single lawsuit. Asset protection is every bit as important as earning the assets in the first place. Let's face it. . .
As a small business owner, you are a big target! We live in a society where lawsuits are all too common. We've all seen those lawyer ads on TV. They're annoying, aren't they? The next time you see one of those ads, you should realize that what they're really doing is advertising for people to sue you! If you are a small business owner, if you have employees, if you are a landlord, if you drive a car, if a family member drives your car, if your employee drives a car, if you own real estate, you need asset protection planning! Here are the main threats to your assets!1. Lawsuits 2. Income taxes 3. Death and estate taxes . . . and here in a nutshell are the asset protection solutions.1. Lawsuits: Keep your assets out of your name and into entities. This page is mainly devoted to this aspect. 2. Income taxes: Split income into lower tax brackets, spend pre-tax dollars, and capitalize all available tax deductions. Corporations are important tax planning tools. 3. Probate & Death Taxes: Use entities, including trusts, to avoid probate and minimize your Estate’s value. See the page on Bypass Trusts for an important strategy for reducing estate taxes. Ways to avoid losing your ASSets if you get suedThere are 5 basic strategies of asset protection to protect you if you get sued:
The attorneys in our firm understand these asset protection strategies and help our clients to implement them. If you would like a no-charge 1/2 hour consultation with Dave Guinan to discuss your particular situation, please click here now. 1. Build a moat or firewall around each of your dangerous assets and use limited liability business entities.Some of the assets we own have the potential of creating liability. A good example is a rental house. If a tenant or visitor trips and falls on the premises, the landlord may get sued. The danger is that the liability from the rental property may bleed over and affect all of the other assets of the landlord.
Another way for the landlord to protect his assets is to hold the title to the rental property in a land trust. In turn, the beneficiary of the land trust would be the landlord's LLC or corporation. Land trusts are uncommon on the West coast. A further explanation of land trusts, click here.
A sole proprietor has unlimited liability for the debts of his business, that is, all of his personal assets are at risk. Worse still, the personal assets of all of the partners in a general partnership are at risk for the debts of the general partnership. A general partner's assets are at risk not only for his own actions, but also for the actions of each of his partners! 2. To the extent practicable, maintain anonymity in the public records.A large number of personal injury lawsuits are prosecuted by attorneys pursuant to a contingent fee. Under that arrangement, the client's fee is a percentage - usually in the range of 25% to 40% or more - of what the attorney collects on the client's behalf. This type of fee has been justified on the grounds that it affords injured plaintiffs the ability to prosecute the lawsuit when they otherwise wouldn't be able to do so. A consequence of the contingent fee arrangement is that a plaintiff's attorney is not likely to prosecute a lawsuit unless he feels he has a reasonable chance of collecting a settlement or judgment. Thus, it is not uncommon for a plaintiff's attorney to do an asset search and inquire about available insurance before he commits to take the case on a contingent fee.
Here's where anonymity comes in. If the public records reflect that you own lots of property, then the chances of the attorney taking on the case are considerably improved. If your name doesn't appear in the public records, the chances of the attorney taking on the case are considerably reduced. In effect, you become a stealth fighter. The "practicable" condition is placed on this strategy because it's possible to take the strategy too far. Some asset protection gurus advise the use of "nominee" officers or managers for business entities so that there is no mention of the officer or manager in the Secretary of State's office. The downside to this is that you may effectively lose control of the business entity if you are not dealing with an ethical resident agent. Our firm has actually represented a client who had allowed his LLC filing to go into default, and who discovered when he attempted to put the LLC back into good standing, that the name of the LLC had been changed and that another unknown person was listed as the manager of the LLC. We were able to fix that situation, but it took time and money. 3. Own your assets in a series of layers.This asset protection strategy might be likened to a treasure hunt where the player has to solve a puzzle to get a clue to solve the next puzzle, and so on.
4. Maintain adequate liability insuranceLiability insurance is a valuable asset protection tool. It provides an available fund to which a claimant can look to settle his claim. As a general rule, an insurance company can't settle a claim unless it obtains a release from further liability for the insured.
For over 30 years attorney Dave Guinan of our firm represented a public agency which exists to protect Nevada insureds and claimants in the event of an insurance company insolvency. The agency steps into the shoes of the insolvent insurer, except that its limits of liability are only $300,000, even though the original limits may have been $1,000,000. His experience in that capacity lead him to coin "Guinan's law," which is an asset protection corollary to Murphy's Law: "The settlement demand will expand or contract to meet the available policy limits." In other words, if you have reasonable adequate insurance policy limits, the claimant will probably settle for those limits rather than going to trial, taking a chance on a defense verdict, and then having to find other assets if he gets a judgment. 5. Create a spendthrift trustA Trust is a centuries old legal tool for estate planning and asset protection. A trust is defined as a legal entity in which a trusted person - the Trustee - holds property for the benefit of another - the Beneficiary. It has long been held that a parent may create a spendthrift trust for the benefit of his child and keep the assets in that trust away from his child's creditors. The creditors could neither reach the assets in the trust nor compel the Trustee to distribute the assets to the child. For more information about Spendthrift Trusts, click here. A brief discussion on strategies to reduce estate (death) taxes . . .An important element of asset protection is reducing death taxes. Estate taxes can have a huge negative impact on estates with high values. The basic strategy for dealing with estate and gift taxes is to reduce the value of the taxable estate. The taxes are computed on the value of the gross estate, and anything that can be done to reduce that value for tax purposes is desirable. Bypass trusts are one of the most effective tools for reducing estate values. There is a detailed discussion of how they work on the Bypass Trust page. LLCs and Family Limited Partnerships can also be used to reduce estate values for tax and asset protection purposes. The strategy here is to divide the membership interests among the children. In so doing, the parents as managers or general partners still have the power of management and control over the business assets, but the ownership interests are split into a number of minority interest shares. Using commonly accepted appraisal principles, a 20% minority interest in a business asset is worth much less than 20% of the whole -- maybe as little as 10%. This is so because the minority interests have two major economic disadvantages: 1. they're not readily marketable, and 2. they don't have any power of management and control. It's difficult to find a buyer under those circumstances, and the buyer certainly isn't going to be willing to pay full price. Therefore, the values are reduced and the size of the gross estate is reduced. Click on the following links for more detailed discussions about these areas of law: Bypass Trusts - An Effective Tool for Reducing Estate Taxes. Spendthrift Trusts - A Great Asset Protection Tool For Investors. Corporations - A Tried and True Business Entity Homestead exemptions in Nevada LLCs - The Porcupine of Business Entities Limited Partnerships - What You Should Know About a Limited Partnership Personal Guarantees - the Good, the Bad and the Ugly
Talk to the Small Business Law Mentor. . . For a no-charge 1/2 hour consultation with Dave Guinan about asset protection, click here now. Return from Asset Protection to the home page
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On the other hand, if the property is the sole asset of a limited liability business entity such as a
An example of this for asset protection is a rental house which is owned by a land trust, the beneficiary of which is an LLC, which in turn is owned by the landlord's estate planning trust. A plaintiff seeking to recover because of some claim arising out of the rental property would discover that the house is owned by the 123 Main Street Trust. He would have to do further discovery to learn that the beneficiary of the trust is XYZ LLC; that might be difficult because the trustee of the trust would not readily volunteer that information. If the claimant were successful in finding XYZ LLC, he could learn the identity of the Manager of the LLC from the public records, but the public records would not disclose the Member (owner) of the LLC. If the claimant could somehow discover that the Member of the LLC is the Legghorn Trust, he wouldn't necessarily discover that the beneficiary of the Legghorn trust is the Landlord. The claimant would have to solve at least 3 information puzzles before he identifies the Landlord. Most claimants are human beings who would tire of spending the time, energy and money before finding the final answer. This is particularly true if there is an available liability insurance policy with reasonably adequate limits.
The insurance policy is just like the bull fighter's red cape - it attracts the attention of the claimant and keeps his attention away from seeking other assets. An additional major benefit of a liability insurance policy is that it covers the cost of defending against the claim. Even if a claim is frivolous, it's still necessary to defend against it, and an insurance policy is sure nice to have to cover that expense. Even if there's a question about whether the insurance policy covers the claim, the insurance company's duty of defense is broader than its duty of indemnity. If there is any possibility the claim is an insured claim, the insurance company has to defend. Once it is defending - even if the defense is pursuant to a reservation of rights - the insurance company is likely to settle to protect its insured if the opportunity arises to settle within policy limits.
When applicable, estate taxes start at about 50% and go up from there. This can be particularly devastating on family ranches where a large value has accumulated in the value of the land, which is not liquid.
