The asset protection attorneys at our firm often assist individuals, business owners, and investors that are interested in asset protection strategies. Without question, it is very important to separate your personal resources from your business assets. In this post, we will look at three different approaches to asset protection.
Limited Liability Companies
If you are starting a small business, and you declare yourself a sole proprietor, there is no distinction between your property and assets that are the property of the business. As a result, if you are the subject of a lawsuit related to your business, your personal assets would not be protected.
To respond to this dynamic, you could choose to establish a limited liability company. If a lawsuit is filed against the business because of your actions, the actions of a co-owner, or wrongdoing by an employee, your personal property could not be attached by the litigant.
Of course, sometimes a bank issuing business loans or a business credit card company will require a personal guarantee from the owner of an LLC. Under these circumstances, you would be liable if you provided a personal guarantee to the creditor.
On the other side of the coin, if you or another co-owner was to be sued personally, assets that are the property of the limited liability company would be protected. One thing to be aware along these lines is the concept of fraudulent conveyances. It is illegal to convey assets over to a liability company after you become aware of the fact that you are being sued.
Family Limited Partnerships
Another asset protection structure that can be quite effective is the family limited partnership. As the name would suggest, the participants in the partnership must be members of the same family.
If you establish and fund a family limited partnership, you would be the general partner, and the other members would be limited partners. The general partner has sole decision-making authority.
To explain the asset protection value through a simple example, let’s say that you own two apartment buildings. You are concerned about being sued by someone who may be injured in the structures at some point in time. To protect your assets, you could convey each apartment building into a separate family limited partnership.
If someone is in fact injured in one of the buildings, and a lawsuit is filed, the target of the litigant would be the family limited partnership. As a result, the personal property that is owned by the partners would not be at risk, and the other apartment building would be safe as well.
To ratchet up the asset protection, you could make sure that there is always limited equity in these apartment buildings. In addition to the asset protection benefits, family limited partnerships can also be used to gain estate tax efficiency when transfer tax exposure is a source of concern.
Self-Settled Asset Protection Trusts
A self-settled asset protection trust can be used by individuals that are not in business. If you think that you may be sued by creditors at some point in the future, you can convey assets into this type of trust. This device is ultimately referred to as a domestic asset protection trust.
The trust would be irrevocable, so you would not be able to directly reach any assets that have been placed into it, but they would be protected from creditors. In the trust declaration, you name a trustee, and if the trust is well constructed, you may be able to receive discretionary distributions from the earnings and even the principal of the trust.
Self-settled asset protection trusts are only legal in 14 states at the present time. However, we practice law in Ohio, and the Buckeye State is one of these states.
Attend a Free Estate Planning Seminar!
Our attorneys are holding a series of seminars over the coming weeks, and you can obtain a great deal of useful information if you attend this session that works for you. There is no charge, but we do ask that you register in advance, because space is limited. You can get all the details if you visit our seminar schedule page.