People often think of estate planning as an exercise in slicing up a pie into different slices that will be distributed to the heirs. Many do not think about the fact that the pie can shrink unnecessarily if they do not take any steps to protect their assets, so this is part of the estate planning process.
Small Business Owners
If you own your own small business, you are leaving your assets in harm’s way if you are operating as a sole proprietor. Under those circumstances, there is no separation between your personal property and the business, and this is an unnecessary risk.
You would do well to utilize an asset protection structure, and a limited liability company (LLC) will often be the right choice. If you establish a limited liability company, in most cases, your personal assets would be protected if the company is sued by creditors or another entity.
There is an exception if you personally and directly cause damages to someone else due to your own negligence. The asset protection also works in the reverse direction, so the LLC’s property would be protected if you are personally sued unless a court issues a charging order against you.
You cannot use a limited liability company to protect assets after you already know that you are going to be the target of the legal action. This is the looked upon as a fraudulent conveyance, and the assets would not be protected.
Another asset protection structure for investors, professionals, and business owners is the family limited partnership (FLP).
As the name would indicate, the participants must be members of the same family, and if you establish the partnership, you would be the general partner with sole decision-making authority. Family members that you add would become limited partners.
To explain through the use of an example, let’s say that you own a restaurant and two apartment buildings. You can put each of the properties into separate family limited partnerships.
If someone files a lawsuit because they are injured in one of the apartment buildings, the other rental property and the restaurant would be protected. Of course, all of the personal property that is owned by the partners would also be shielded from the litigant seeking redress.
All the properties held by the respective partnerships would be protected if any partner is personally sued, so there is two-way protection with a family limited partnership.
In addition to the asset protection benefit, people that are exposed to the estate tax can use family limited partnerships to facilitate tax efficient transfers.
Personal Asset Protection
A self-settled asset protection trust can be used to protect your resources for future creditors. They are not recognized in every estate, but you can establish one of these trusts in the state of Ohio.
Your assets would be protected from most types of legal actions if you take this step, but once again, you can’t use the trust to protect assets after you are being sued. Plus, it would not protect the assets if you are required to pay alimony, child support, or back taxes.
Estate Tax Asset Protection
We touched upon the fact that a family limited partnership can be part of an estate tax efficiency strategy, and this tax can consume a significant portion of your legacy if you are exposed. It carries a 40 percent rate, but it is only applicable on the portion of an estate that exceeds the exclusion.
In 2021, the federal estate tax exclusion is $11.7 million, but it is scheduled to go down to $5.49 million in 2026. In addition to the family limited partnership, there are other steps that can be taken to mitigate your exposure if this is going to be a source of concern for you.
We Are Here to Help!
If you are ready to work with a Cincinnati estate planning attorney to develop an asset protection plan, we are here to help. We can gain an understanding of your situation and your legacy planning goals and help you devise a plan that ideally suits your needs.
You can call us at 513-721-1513 to set up a consultation, and you can fill out our contact form if you would prefer to send us a message.