Are Your Assets at Risk?

 

I want to know more about Search

 

Every business owner needs a comprehensive asset protection plan because owning and operating a business can be risky. For example, businesses may default on open accounts with vendors, or default on mortgages or other secured loans from banks. Further, many of these debts may be personally guaranteed by the owners. Potentially, owners or employees may commit negligent acts while carrying out company activities.

Moreover, consumers may bring claims for injuries suffered due to the sale of defective products, or claims based on unfair and deceptive business practices, which (though unwarranted) could produce a financial settlement. Also, claims by employees, such as wrongful discharge and sexual harassment, are on the rise. These risks could bring about financial disaster for business owners, resulting in the loss of both business and personal assets.

A comprehensive asset protection plan, which can be designed based on the principles explained in this section, can prevent or significantly reduce these risks, and insulate business and personal assets from the claims of creditors. Unfortunately, many small business owners are unaware of these principles, or simply misunderstand them.

Warning In order to limit exposure to events that could cost a company its assets or close it down completely, many small business owners form a corporation or limited liability company (LLC), hoping to protect the owners' personal assets outside of their businesses. However, many business owners are unaware that significant exceptions exist to this limited liability. And when an exception applies, personal liability is imposed on the owners, despite the fact that a corporation or LLC exists. Accordingly, owners' homes, cars, personal bank accounts, investment portfolios, etc., are all subject to the claims of business creditors. With knowledge and planning, however, these exceptions can be avoided, and thus limited liability preserved.

Beyond avoiding these exceptions, much more should be done to protect personal and business wealth. For example, most business owners mistakenly believe that assets within a corporation or LLC are automatically shielded from liability. However, most business owners face the greatest risk of liability from business transactions, and not personal dealings. Therefore, the business entity's assets, which can be significant in a successful operation, are exposed to the greatest risk of loss. Yet, a corporation or LLC can be structured, funded and operated so that the business's assets are not exposed to liability.

Further, personal and business assets can be placed in protected categories and thus out of the reach of creditors, so that, even in a worst-case scenario (e.g., a judgment in a major lawsuit or a bankruptcy filing), there will be no loss of assets in any event. This can be accomplished through state and federal exemption planning, and through the use of asset protection trusts.

Exemption planning is a very important part of an asset protection plan. In fact, in some cases, it may shield the majority of your assets. However, once serious financial problems arise, it's often too late to transfer unprotected assets into exempt categories. The planning must be done beforehand, or you run the risk of having your transfers treated as ineffective or even fraudulent by the courts.

Your exempt assets can usually include a residence; pension plans; wages; annuities; and various categories of personal property, including household goods, tools of the trade, and motor vehicles, among other things. Many categories of exempt assets have dollar caps. Moreover, the exemptions and the caps vary widely from state to state.

Work Smart This multi-layered approach to asset protection offers redundant protection. One strategy alone may be sufficient to prevent loss. Taken together, however, they can present an insurmountable barrier to creditors. Today, it is entirely possible to protect all of the business owner's personal and business assets, even in the worst of financial circumstances.

• How Creditors Get Your Assets gives a summary of the types of liens, including judgment liens, that you may encounter as a small business owner and how they can cost you. Recognizing the dangers that certain liens pose for your business will allow you to prepare for such possibilities. We also offer strategies for battling those liens actually filed against you, as well as ways to avoid them in the first place.
• Bankruptcy-An Overview discusses the purpose of the bankruptcy code, for creditors and debtors, and the protections it offers under the law. Moreover, Congress is seriously considering bankruptcy reform for the first time in decades, and the implications of these potential changes are covered as well.
• Effective Asset Exemption Planning focuses on developing an overall understanding of how asset exemptions work. After reading this section, you will be able to decide whether an exemption will, or will not, protect an asset that you own, and how to most generously take advantage of it.
• Avoiding Challenges to Asset Transfers is an integral part of effective exemption planning. It covers strategies that can be used to make legal asset transfers, including the conversion of nonexempt assets into exempt assets.
• Using Asset Protection Trusts explains how you can, in effect, create another exemption by placing your assets in a sophisticated form of trust. Properly formed asset protection trusts will make your property unavailable to creditors even when no other exemptions apply.

After reading these sections, take an inventory of the assets you own, and how you own them. Then compare this list to the asset exemptions available in your state and, if applicable, under the federal bankruptcy code. In doing this, you will be able to gauge the degree of risk you face and make adjustments (conversions of assets) accordingly.

As detailed in our discussion on asset transfers, timing is critical in asset exemption planning. Ideally, then, you'll do this planning before your business is formed. Nevertheless, an owner of a thriving business also is an ideal candidate for effective exemption planning. Significant wealth can be protected before any serious problems develop.

The poorest candidate for exemption planning is the small business owner who is already in the midst of a financial crisis. Even here, however, steps can be taken, albeit cautiously, to protect assets. In this situation especially, you should seek the guidance of a professional advisor before undertaking any planning steps.