Asset Protection During Economic Downturns For Business Owners and Professionals

In an economy like today’s business owners, executives, professionals, and many ordinary families face an increasing risk from creditor liability and lawsuits.Each year theories of liability expand, making it more difficult to protect assets. A downturn in the economy, such as the one in which we now find ourselves, can increase the risk of creditor threats. For many in the business and professional communities, the economy’s current woes provide an incentive for creating a plan to protect the assets they have spent so many years and so much effort creating.   The Top Threats of Liability in Today’s Economy   ·        If they have sold or intend to sell a business, and the business does not meet the new owner’s expectations, they may be the subject of a suit by the disgruntled purchaser. The seller of a business typically must sign off on a wide variety of “representations and warranties,” and an unhappy purchaser can often leverage these against the seller, claiming misrepresentations or the use of misleading projections. ·        With a greater risk of business deals falling through, there will also be an increased risk of litigation. ·        If companies do not perform well, shareholder suits can multiply. ·        If the economic downturn severely affects a business’s cash flow, or if a business is forced to liquidate, there may be suits by suppliers and lenders. Plaintiffs in such suits may attempt to “pierce the veil” of the business entity and move against the owners’ personal assets. ·        In a time when many family’s net worth has recently decreased, they feel a greater need to protect the family’s still-existing nest egg from the effects of claims. ·        A person experienced in one business may have investments in unfamiliar business activities. One could find oneself as a general partner in a risky endeavor, the potential liability for which is increased during economic bad times.  ·        Business owners often expand their activities to include service on Boards of Directors for corporations and community boards or trusts. Liability insurance is often costly, and deep-pocketed individuals serving in these capacities can often attract lawsuits or claims. ·        Unfortunately, statistics show that economic difficulties can also have collateral effects, such as marriage difficulties, and planning above and beyond a prenuptial agreement may be a consideration.   These concerns are in addition to those always faced by people in the business community, regardless of the state of the economy. As businessmen and women know, in dealing with a third party there is always an inherent financial risk, whether the risk relates to a service provided to the party, a product (or other asset) sold to the party, a disgruntled or injured employee, an unforeseen accident, etc. To protect against such risks, businesses often operate in the form of a corporation or limited liability company, and families and businesses purchase insurance. These forms of asset protection do not, however, fully protect a family’s assets from unforeseen liabilities and uninsured losses. Because of this, many planners recommend an “integrated estate plan,” which combines traditional estate planning with asset protection planning. The asset protection component of the planning focuses on protecting the personal wealth of the business or professional person and his or her family.   So what “integrated estate planning” arrangement is considered the best to avoid being targeted by plaintiffs and contingency fee lawyers? Competent planning that includes the use of a protective trust is the most effective. What better way to convince the plaintiff’s attorney to just go away (perhaps with a token settlement) than to demonstrate to him or her that even if a judgment is rendered against you, protected assets are not going to be available to satisfy that judgment.    The Structure   The most effective asset protection planning usually entails the use of a trust carefully created to protect assets. A primary asset of this protective trust will often be a significant ownership interest in a corporation, Limited Liability Company or a limited partnership, which in turn is controlled by the individual or spouses who created the trust. The better planning arrangements are tax neutral, in other words they are not specifically designed to avoid or defer income or estate taxes beyond the scope of traditional tax planning. This avoids a number of the limitations and loss of control inherent in tax planning.   Asset Protection Trusts combined with Family Limited Partnerships or Limited Liability Companies offer a family’s breadwinners a rare combination of control over, benefit from, and protection for their assets. For instance, a person who creates such an arrangement can retain unilateral control over all of the assets placed within the FLP or LLC by virtue of their being the only general partners of the FLP or managing member of the LLC. At a time when the waters are calm with respect to creditorâEUR’sensitive issues, they can transfer a significant limited partner’s interest to the Asset Protection Trust (APT). The APT is usually a discretionary trust during the spouses’ lifetimes for the benefit of the spouses, their children, their grandchildren and any other person or entity for whom they may wish to provide benefits.     Tax Neutrality             The APT is income and estate tax neutral in that all assets within the arrangement will be included within the decedent’s gross estate for federal estate tax purposes. In other words, these APTs have a time-of-death result (including the avoidance of probate administration) identical to that of revocable living trusts. This avoids the loss of control over assets that is common with significant tax planning.     The Problem With Relying on FLPs or LLCs   One of the major problems of relying on protection of LLCs and FLPs for business assets is that if there is a claim arising from a personal matter, not connected with the protected activity, all assets, including ownership interests in the LLC or FLP, are at risk. The protection an asset protection trust provides is therefore critical to guard against this risk. Another serious concern for many professionals in the area of asset protection is that the domestic protection gained from the use of FLPs or LLCs could be retroactively eliminated. The popularity of FLPs is attributable to their rendering an individual’s or family’s assets unattractive to a potential future creditor, since most states’ partnership laws provide that the sole remedy of a creditor of a partner is a “charging order.” 

A charging order is a relatively impotent remedy because (i) it does not allow the creditor to seek a forced sale of the debtor partner’s partnership interest; (ii) it limits the creditor to receiving from the partnership anything that the debtor partner otherwise would have received (yet the debtor can still retain control as a general partner over whether anything will actually be distributed); and (iii) the IRS treats the creditor with a charging order as a substitute partner for federal income tax purposes, thereby potentially attributing taxable income to the creditor despite his not receiving an actual distribution. Unfortunately, the husband and/or wife may still need to access the assets of the FLP. If they were to do so, the judgment creditor with a charging order would receive the partnership distribution instead.    Moreover, chinks in the armor of charging order protection have begun to appear on the domestic scene. Courts in several states have held that a judgment creditor was not limited in its collection remedies to obtaining a charging order and was in fact able to attach and sell a limited partner’s interest in an FLP to satisfy a judgment that a creditor had obtained some years earlier. Since the underlying rationale behind charging order protection is to protect the partnership’s business from the problems of a given individual partner, and since most FLPs are not engaged in a trade or business but, rather, are only holding passive investment assets, it would not be surprising to see this line of reasoning substantially erode even the limited protection that charging orders afford debtor partners. Another problem is, of course, that the husband and wife remain subject to the whims of the domestic system if one limits the planning to domestic tools.   Problems and Concerns With Single Member LLCs   As case law and interpretation develops, we have also become increasingly concerned about significant potential asset protection problems with single member LLCs. For this reason, we no longer use or recommend single member entities for asset protection purposes. A much more effective alternative is the integrated plan, using an Asset Protection Trust, often in conjunction with a Family Limited Partnership or LLC, for better asset protection.   There have been two recent cases, In Re Ashley Albright and Littriello v. United States et. al that have called into question the asset protection available with single member LLCs. Without the proper asset protection planning the consequences may be disastrous.   Albright was a federal bankruptcy case where the entity was disregarded. Littriello was an employment tax liability case where the entity was again disregarded and the owner, Littriello, was found liable for the entity’s taxes. In Littriello, the taxpayer was found liable for the entities liabilities and was treated as a sole proprietor. What the taxpayer wanted to do was avoid the double taxation of a C-Corporation while trying to maintain the asset protection features that come along with owning a business as an LLC. The recent court cases seem to be of the opinion that single-member ownership of an LLC offers little to no asset protection.   Although a domestic Asset Protection Trust offers solid protection in conjunction with a Family Limited Partnership and/or limited liability company, for those that are concerned about remaining within the reach of the domestic legal system, an international asset protection trust should also be considered.   Strategy of Strength – Not Obfuscation   If a business owner, professional, or executive, or any other person concerned with insulating his or her assets during economically difficult times, creates and funds this type of domestic or international asset protection trust, it will not merely be to create an obstacle for opponents to hurdle. Reliance should never be placed upon obscuring the trail to assets or upon the hare staying one step ahead of the pursuing wolf pack. While there may indeed be a number of lesser impediments that could frustrate some opponents, a proper plan assumes that each potential opponent will be an emotional, deepâEUR’pocketed judgment creditor who is willing to travel to the ends of the earth in order to pursue the client. Furthermore, a proper plan assumes that such an opponent will eventually clear any interim hurdles. The planning ultimately must work because it is legally sound.  

However it is critical to understand that the time to protect you and your family’s assets is before a potentially devastating claim or creditor situation arises. After that, transfers of property could be considered fraudulent conveyances. You are not planning for a rainy day here. You are planning for a hundred year flood, and it must be done before it is too late. As shown, this can be accomplished while retaining (i) a significant degree of control over, (ii) the use of and (iii) the beneficial enjoyment from the transferred assets.

Our process

At Dennis Sullivan and Associates we help our clients meet their goals and objectives through a process that combines education and counseling. The process begins with an educational Trust and Life Planning Workshops, held twice a month in Wellesley (for upcoming dates and to register, please call (800) 964-4295 or see our website at http://www.DSullivan.com). The workshops are an excellent way to review existing planning, if any, and learn about the options available with estate and asset protection planning. We welcome all members of the community to attend. For those that cannot attend, please contact our office for a unique self guided 19 Point Trust, Estate and Life Planning legal guide.

After the workshop or a review of the 19-Point Trust, Estate and Life Planning legal guide, we provide a personalized review of asset protection and estate planning concerns and opportunities of each family. At the meeting we help people develop a customized plan together that will meet a family’s goals and objectives, including protecting assets, avoiding probate court involvement at disability and death and minimizing the impact of state and federal taxes.

Once the plan is established we help review it annually to make sure it continues to meet a families objectives even as the law, finances and personal circumstances change. We call this annual review process the Lifetime Protection Program. As part of the program we review your planning for changes in law and circumstances, make sure your assets are coordinated with your trust. We also help create planning that will be effective if you are disabled or need nursing home care.

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www.lodmell.com 800-231-7112 Douglass Lodmell, the nation’s #1 Asset Protection Attorney explains in this animated video exactly how the 3 main asset protection tools work together. These include the Limited Liability Company (LLC), the Limited Partnership (FLP) and the all important Offshore Asset Protection Trust (APT).
Video Rating: 5 / 5

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