In last month's issue of Adler Law, we learned how to determine if you are an attractive target to creditors and we explained that if you wait too long to start an asset protection plan, it may already be too late to protect your assets. This month, we will discuss various asset protection planning strategies you should consider incorporating into an asset protection plan of your own.
Asset Protection Planning Strategies:
There is no one asset protection planning tool or technique that universally protects all of an individual's assets, so a plan needs to involve a mix of various tools and techniques which depend in part on your specific circumstances.
The following asset protection strategies should be considered when formulating the proper plan for you.
1. Right Business Entity Choice
Whether you own real estate, a professional practice or any kind of small business, it is imperative that you choose the proper form of entity because every customer, patient or tenant represents a potential liability, threatening whatever savings you have accumulated.
For example, a Limited Liability Company ("LLC") is generally the most convenient and flexible entity choice. An LLC also avoids many of the tax problems and the maintenance expenses associated with corporations. The law effectively insulates the owners of the companyfrom any liability produced by the business. In other words, your personal assets are not subject to the risks of a business operated within the LLC.
2. Avoid Business Partnerships
Business partnerships are very risky. Partnerships can produce huge liabilities for you which are totally unexpected and not your fault. As a co-partner you could be held responsible for partnership debts and any negligent acts of your partners. A business partnership expands the scope of your personal liability when you should be trying to limit your risks.
3. Avoid the Personal Guarantee
Much of the protection which can be accomplished with a corporation will be lost if you give a personal guarantee of a corporate obligation. Sometimes a lender or a lessor will not require a personal guarantee if he or she can be persuaded that the business or proposed venture is sound. If you sign a personal guarantee, you are placing 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.
4. Use Multiple Entities
Those of you who have more than one investment property or several types of businesses should use different entities to own each property or conduct each business. The goal is to insulate each separate property or business from liabilities produced by the other activities.
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.
Accordingly, the ownership of assets 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 investment property, your business or your other risky assets.
Whether the right asset protection strategy involves gifting assets or selling your assets to your new entities, it is likely that you will be transferring those assets to a Family Limited Partnership, a Limited Liability Company, an Asset Protection Trust, or some form of Irrevocable Trust. Each has its own advantages and often all of these entities will be incorporated into the right asset protection plan for you.
Get Competent Advice:
Designing your overall plan and preparing the documents necessary for asset protection, tax efficiency, and estate planning must take place under the guidance and supervision of an attorney who specializes in these matters. A successful strategy involves a careful analysis of your business structure to make sure that potential liabilities are properly controlled with Dangerous and Safe Assets insulated from each other. The operation of your business or professional practice should be evaluated to minimize taxes through specially designed individual strategies. Asset protection and estate planning choices and alternatives should be presented to you and clearly explained so that you can make sound and informed decisions.
Once again, your asset protection plan must be created in advance of any claim or threatened litigation. Every state has laws prohibiting the transfer of assets to avoid paying existing or anticipated claims. If you make a transfer when you know or have reason to believe that there may be a case against you, the other party has the right to try to unravel your plan. Try to address your asset protection needs before difficulties arise in order to accomplish the best results.
If you need assistance or would like to discuss your personal situation, please feel free to call our offices at (516) 876-1105.