Your business has been performing well for years, turning a profit and continuing to grow. Then, out of the blue, you get served with a lawsuit. If you aren’t prepared for this scenario, you’re putting your business in jeopardy.
Asset protection is a near 50-year-old specialization of debtor-creditor law, where niche business attorneys and consultants will seek to structure business and personal assets in such a fashion to where they become somewhat invulnerable to creditor civil judgments. It’s important to note, however, that said asset protection procedures must be done in ways that are not illegal, such as to conceal assets, to do fraudulent transfers, tax evasion, bankruptcy fraud or through contempt of court.
Sharks in the Water
As your business grows, so does your business and personal assets as well as the net worth of both your business and you as an individual. This level of growth requires that you begin to focus on asset protection early, while there are no sharks in the water, to help shield your assets from potential civil money judgments before any civil lawsuits take place.
There are indeed attorneys (and individuals in general) who prey on the affluent through the formation of frivolous lawsuit claims, with the sole purpose of seeking a “settlement.” On top of this comes the increased levels of risk of violating one of the various forms of business regulations that are present (either intentionally or unintentionally). In this case, The Notorious B.I.G. was indeed correct when he said, “more money, more problems.” Here are some ways to help protect your assets from America’s litigious society.
Legitimate Asset Protection Methods
There are a number of consultants pushing asset protection schemes and programs in the marketplace today, so you want to be wary as most of them not only don’t work in terms of protecting assets from civil judgment claims, but they can also be illegal in terms of having you commit tax evasion, fraudulent transfers, contempt of court and more. Some legitimate forms of asset protection include:
- Properly insuring yourself and your business activities
- Incorporating your business and using multiple entities to protect multiple assets
- Equity stripping
- Using trusts
- Structuring your assets within the available Employee Retirement Income Security Act (ERISA) Laws
- Practicing good, ethical, behavior
Below, I’ll dive into each of these methods and how you can implement them to protect yourself and your business.
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You want to work with your insurance broker to make sure you are properly insured both personally and professionally. This should be the core of your asset protection planning procedures. For your personal insurance aspects, some essential policies to consider (related to potential civil judgments) include:
- Car Insurance
- Home/Renters Insurance
- Personal Liability Insurance
- Premarital/Non-marital Agreements
- Personal Umbrella Policies (provides additional coverage levels beyond policy limits)
For your business insurance aspects, some essential policies to consider include:
- General Liability Insurance
- Professional Liability Insurance (Errors and Omissions)
- Workman’s Compensation Insurance: Covers the cost if an employee is injured while working.
- Product Liability Insurance
- Specialty Coverages
- Business Umbrella Policies (provides additional coverage levels beyond policy limits)
You can choose a couple of different entities to incorporate your business, such as a C-Corporation, S-Corporation or Limited Liability Company (LLC), all of which are structured to provide liability protection against commercial debts, lawsuits and other obligations, separating your personal assets from risks of business affairs.
If you have multiple business assets with their own level of separate risks, you can utilize multiple entities for each business asset. One structure you would use for this (depending on your state) is the Series LLC, which is a structure that allows you to put separate/independent LLCs under one business entity structure.
The concept of equity stripping is based on the fact that it’s hard for a creditor to make a claim against an asset that technically has little to no value — on paper, at least. This would be due to the asset being currently pledged (with an active lien) by another creditor, which in this case would be a financial institution. So you would take out a loan and borrow against your assets to reduce their value in the eyes of a prospective civil judgment plaintiff.
Putting your assets in a domestic trust can provide some form of protection against civil judgments, with even some states allowing self-settled trust protection, which are trusts where the creator is also a beneficiary. Note that Offshore Trusts are usually pushed by many asset protection consultants with the promise of offering the “most” protection, but be weary of these schemes as they can usually lead to contempt of court, your assets being stolen, tax evasion and other acts that do nothing but cause additional legal problems rather than helping to alleviate present ones.
US ERISA & Federal Bankruptcy Laws
The US has state specific exemption laws that exempt certain assets from civil judgment execution, as well as, protects them from being settled in a bankruptcy filing. Assets included typically include your homestead real estate property, pension/retirement plans, life insurance proceeds, annuity proceeds, wages, public benefits, tools of trade, and personal/miscellaneous property. You would want to work with a Business Attorney who specializes in ERISA/State Exemption Laws to help you properly structure your assets based on the coverages available, as well as, properly defend said asset coverages in time of legal proceedings. Each state has its own listing of coverages, but among the states with the best coverage is the great state of Texas, which has the following coverages:
- Homestead: Unlimited value up to 1 acre in a town, village, or city
- Pensions/Retirement: Roth IRAs and regular IRAs up to $1,245,000 per person
- Insurance: All policy proceeds, including annuity proceeds
- Personal Property: Various forms of equipment, clothing, jewelry, animals, and more
- Tools of Trade: Various tools and equipment used for business trade
- Miscellaneous: Business partnership related property
- Wages: Earned but unpaid wages, as well as, unpaid commissions up to 75%
- Public Benefits: Unemployment and Worker’s compensation
Last but not least, while not necessarily an asset protection “tool”, practicing good and ethical behavior in your personal and business affairs also is a strategy to protect your assets. Many people practice flat out jerk behavior personally, such as using online discussion forums to slander individuals, which attracts potential civil lawsuits. In addition, many people practice unethical business behavior which not only racks up complaints online at places like RipOffReport, but also attracts potential civil lawsuits. By having a focus on good/ethical behavior, you can help avoid potential legal issues.
A Final Note
Make sure that all asset protection strategies are in place prior to a legal case, as you don’t want to potentially be hit with a violation of the Uniform Fraudulent Transfer Act (UFTA), which covers transfers made by debtors that have the “actual intention to hinder, delay or defraud” a creditor. We operate in one of the most litigious societies in the world. Make sure to get with your Business Attorney today to structure your personal and business assets in such a way that said structure offers asset protection against frivolous lawsuit claims, professional plaintiffs, and personal/business negligence.
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