Small Business Financial Article
|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Business Owners Exposed - Managing Risks to Protect Your Assets
For many successful business owners , their biggest asset is their business, but many will also accumulate significant personal assets which increases the risk that they will be targeted by creditors or claimants. Business owners who are guarantors of their business debt face even greater exposure should their business come under a liability attack. While many business owners will take steps to protect their business assets, there are many aspects of asset protection that need to be considered to ensure the protection of their personal assets.
Genuine Asset Protection versus Shady Schemes:
You may have gone on the Internet and searched for “Asset Protection,” and what you found, to your astonishment, was hundreds of websites offering information, advice and products. And, to your consternation, you probably also found that many are offering the “silver bullet” that will take your assets to some offshore haven where they can’t be touched, even by the most diehard revenue agent. But, unless you’re able to fly to these locations in your private jet, they should probably be avoided if only to be able to fly your legal team there when the government goes to sue you there.
The amount of case law on offshore asset protection schemes is somewhat limited. However, in the few high profile cases involving alleged tax avoidance, the government has come out on top. Although there are some legitimate asset protection strategies that involve placing assets where creditors and litigators can’t touch them, they should be pursued with caution especially if the tax implications of the strategy are more than just minor. And, if it can be shown that the strategy was conceived in an attempt to defraud a creditor or claimant, there really is no place to hide. Such strategies should only be pursued with the help of a legitimate, qualified, and independent attorney specializing in international asset holdings; and “packaged solutions” for asset protection should be avoided.
Using Insurance to Dodge Creditors:
A legitimate risk management specialist will typically recommend that, first and foremost, your asset protection strategy be anchored with a personal umbrella liability insurance policy, as big as you can get. Generally, you should own an umbrella policy in an amount equal to your assets (i.e.,$10 million umbrella policy to cover $10 million in assets). An umbrella liability policy is relatively inexpensive – about $300 for the first $2 million in coverage, $75 to $85 for each additional million), and they provide protection against most anything and everything that isn’t covered by your homeowners, auto or business insurance plans. More importantly, when creditors or claimants see that you have an umbrella policy in place, they will direct attention towards the insurance carrier, not you.
If you don’t own it they can’t take it:
One of the more common, and legal strategies in asset protection is the transfer of asset ownership in a way that takes you out of the picture, yet you still control the assets. A perfectly legitimate tool is an irrevocable trust – an arrangement in which the assets, such as real property or even a business, are assigned to a trust and managed by a trustee. Once transferred, the assets can be removed from the financial statements of the business owner. However, if it can be shown that this strategy was used in contemplation of an attempt to defraud, it can, and almost always does backfire.
Using Estate Planning Tools:
A basic estate planning tool offers what might be the ultimate solution for married couples where only one of the spouses has an interest in the business. Each spouse is allowed an unlimited exemption on the transfer of assets between each other. In order to maximize the exemption for the whole estate, couples can set up a Unified Credit Trust which is designed to hold the assets of the deceased spouse. In the case of the business owner, the business interest can retained by him or her while an equal amount of personal assets are transferred to the portion of the trust to be held by the spouse. This estate planning technique has held up in case law as a way to remove the business owner from the ownership of the business.
Not all LLCs are Alike:
Business owners have been using LLCs to protect their personal assets from claims arising from business liabilities. However, unless they are properly structured for the business, the business owner may find that the protection is full of holes. With LLCs there is no such thing as “one size fits all,” and each state sets its own rules as to the level of protection an LLC can provide in certain situations.
In very few states will LLCs actually protect the business owners from creditors intent on seizing their interest in the business. Because the interests of an LLC are different from state to state, it would be important to determine which state can provide the ultimate protection your business needs and consider establishing your LLC residency there.
Asset protection for business owners is not a simple matter that can be addressed through packaged solutions or silver bullets. Any consideration of an asset planning strategy should be done in consultation with a qualified attorney with case law experience in asset protection and taxation.
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