ASSET PROTECTION-THE SECRET TRUTH ABOUT PROTECTING ASSETS FROM PREDATORS AND CREDITORS
Do You Know What You Can Accomplish By Implementing An Asset Protection Strategy For Your Personal And Business Assets?
Planning for the protection of assets involves planning for those assets used in operating your business and planning for protection of assets held by you individually. Planning for the individual owner will protect the owner’s individual personal interest in the company from the owner’s creditors, but it will not protect the operating assets of the company. Protection of personal interest strategies include gifting, use of exempt property, use of insurance, and the use of various trusts.
Protection of business interest includes a different set of strategies. Those strategies include the use of domestic and offshore trusts, investing assets in limited partnership or a limited liability companies, distributing liquidity not required for operations to individuals, dividing the company into multiple companies to protect one company’s liabilities from affecting the other company’s assets, equity stripping from a company, and arranging a sale and lease back where separate entities own equipment or real estate and lease it back to the other company.
Asset Protection and the Fraudulent Conveyance Act-What You Need To Know
Each state has its own Fraudulent Conveyance Act that prevents the transfer of assets for a period of time before a claim of a creditor or someone injured arises. Under the Fraudulent Conveyance Act in Oregon, the Court can look back on transfers made within four years before a claim arises to determine that the transfer of assets was a fraudulent conveyance made to defraud a creditor.
The Fraudulent Conveyance Act requires a transfer made with the intent to hinder, delay, or defraud a creditor. It applies both to present and future creditors. The creditor need only show that the transfer was made to hinder, delay, or defraud any creditor.
Remedies to a creditor under Fraudulent Conveyance Act generally provide for attachment or injunction against the transfer in question and potentially the appointment of a receiver to take charge of the asset transferred. In contrast, in the case of bankruptcy, the Bankruptcy Act provides the bankruptcy trustee with a broader range of tools to void any transfer of an interest in the debtor’s property or in any obligation incurred by the debtor if there was a debt incurred within two years before the bankruptcy petition was filed. Thus, consideration should be given to any transfer strategy in light of the Fraudulent Conveyance Act, especially the consequences if a claim arises with in four years, and the Bankruptcy Act, if the transaction occurs within two years of filing a bankruptcy petition.
What Successful Business Owners Do to Protect Their Personal Assets
Use of Exempt Properties for Protection
Estate planners have a large toolbox of tools that can be used to protect your assets from creditors while you are living, and to protect your beneficiary’s inheritance after you die. With respect to creditors, state law and federal bankruptcy law provide certain exemptions for property which the legislature has deemed to be exempt from attachment by creditors. For example, in Oregon, a married couple has an equity exemption in their home that is protected from creditor’s suits. Qualified ERISA plans are also exempt property that allow some protection from creditors.
Exemption planning consists of holding your assets in a form typically exempted from creditors by statute. In Oregon exempt assets include a portion of your homestead, pension plans, life insurance proceeds, unemployment benefits, a certain amount of tools of the trade, a certain amount of wearing apparel, hand guns with a limitation, a certain portion of equity in a vehicle, books, pictures and other items up to a limited amount. While exemption planning provides some protection, clearly not all assets can be held in exempt form. Further, under the current bankruptcy law there are limitations on exemption planning.
Insurance to Protect Against and Defend Lawsuits
We live in an overly-litigious society where an overabundance of laws and an increased scope of duty costs everyone money. A frivolous lawsuit could happen to you and your business if you are not protected. Even if you successfully defend a lawsuit, you will pay dearly. Defending a lawsuit, even if you are victorious, will cost you as much as $50,000.
Do frivolous lawsuits occur? The following are real lawsuits:
- In March 1995, a San Diego man successfully attempted to sue the city of San Diego and Jack Murphy Stadium for $5.4 million over issues with a restroom. Robert Glaser claimed the stadium’s unisex bathroom policy at a Billy Joel and Elton John concert caused him embarrassment and emotional distress thanks to the sight of a women using a urinal in front of him. He subsequently tried “six or seven” other bathrooms in the stadium only to find women in all of them. Due to embarrassment he could not go to the bathroom during the concert. Yes, a lawyer actually took the case.
- A California man sued a county library for $1.5 million when is 50-pound Labrador, was attacked by the library’s 12-pound feline mascot, L.C. (also known as library cat).
- A high school basketball player was awarded $1.5 million by a jury for an eating disorder caused after her high school basketball coach yelled at her to lose 10 pounds, eat nutritiously, and stay away from junk food. The jury was somehow persuaded that the coach caused her eating disorder.
- A woman was awarded $780,000 by a jury of her peers after breaking her ankle tripping over her own toddler who was running amok and unsupervised inside a furniture store.
- A man was awarded $74,000 and medical expenses when his neighbor ran over his hand. The man apparently didn’t notice a driver in the car as he was trying to steal his neighbor’s hubcaps.
Another option is to obtain special insurance to protect against certain specific types of losses. Generally, insurance will provide protection for tort liability, but individual policies may have specific exclusions that exclude coverage for a claim, or the amount of the claim may exceed the amount of the insurance policy limit. However, you may be able to purchase insurance for a specific risk that you feel might occur in the future.
Business Structures Can Provide Some Protection
For family owned businesses or high worth professionals, methods of asset protection can be combined with a family limited partnership or a limited liability company for an additional layer of protection. However, creditors can attack the limited partnership interest where partnership interests are subject to fraudulent conveyance statutes, or through a creditor obtaining a judgment and stepping into the shoes of the debtor and potentially judicially foreclosing on a partnership interest.
A debtor cannot transfer individual assets to a limited partner or limited liability company when there is a pending claim unless they provide for the existing claims. Such a transaction would constitute a fraudulent conveyance and would provide no protection.
When a creditor has obtained a judgment, in Oregon, a creditor can obtain a charging order against the debtor’s share of the limited liability company and obtain the rights of assignee of the membership interest. If the charging order is against a limited liability company, in Oregon, the charging order constitutes a lien on the debtor’s transferable interest and a court may order foreclosure of the interest subject to the charging order. The purchaser at a foreclosure sale would have the rights of a transferee and their interest could be redeemed by having the debt paid off. Further, to the extent that the debtor files for bankruptcy, courts which have addressed the issue have disregarded any charging order protection and foreclosed directly on the interest of the debtor in the limited liability company. However, in many States, the creditor cannot forclose on a
Irrevocable Trust- When You Are Really Sure
An Irrevocable Trust is a trust that can’t be modified, amended or terminated without the permission of the beneficiary. The grantor, having transferred assets into the Trust, gives up control and any interest in the assets. This effectively removes all of his or her rights of ownership to the assets and the trust. An Irrevocable Trust can be created during a person’s lifetime or it can be a testamentary Trust that is created and funded after someone’s death. Thus, with a testamentary Trust, no one then living can change or modify he terms of the Trust.
Protection Trust- Do They Work in Oregon?
Domestic Asset Protection Trusts are recognized in some states and can be used for asset protection of business assets. Other states hold that Domestic Asset Protection Trusts are against public policy. Oregon is one of the states that does not provide in its laws for a Domestic Asset Protection Trust. Some advisors argue that an Oregon resident could use a Domestic Asset Protection Trust formed in another state. Other advisors question that position.
There are at least four theories used for recovery from a Domestic Asset Protection Trust:
- The Trust was funded by a fraudulent avoidance act conveyance;
- The Settlor, the person creating and funding the Trust, retained too much control;
- The Settlor retained too much interest; and
- The Trust is a sham.
For this form of Trust to work, it must be set up before there is a creditor claim, and the Settlor is going to have to give up control and any interest. If a Settlor can live with those conditions a Protection Trust may shelter assets.
Implement These Strategies for Protection of Business Property And Make Your Attorney Think You Are a Genius
Use of Protective Offshore Trust
The company transfers its assets to the Trust and the company becomes the Trust beneficiary. Distributions from the Trust go directly to the owners of the business, however, because of tax issues distributions are made on behalf of the company. The business owner generally will not have a right to direct distribution. It should be noted that there are some tax issues with this transaction which may affect the desirability of using this strategy. Also, recently Courts have addressed offshore Trusts and required distributions against the threat of contempt charges.
A business entity, just as an individual may do, can use a Limited Partnership or Limited Liability Company for asset protection purposes. Creditors of the Limited Partnership or Limited Liability Company are generally limited to a charging order against the person’s interest in the company. While the creditor can have an interest in the company, under most state statutes they cannot force liquidation of the entity. In this situation the company owners will often divide liquid assets to one company and allocate real property to another company. The operating company will hold a 99% limited partner or membership interest in the other companies.
Reorganization Into Two Businesses When One Is a Riskier Business
Some companies have operations that are riskier than the others and liability arising in one area may have a negative effect on the assets of the other. For example, the company may have hotels in multiple locations, but also sells timeshares in the same organization. The corporation may separate its hotels in each city from the timeshare operation. Thus, the liability caused when someone falls off a balcony in a hotel in Kansas City is not transferred to liability for the time share company located in Houston. In this situation, only the assets at the Kansas City hotel would be exposed in the personal injury lawsuit.
Removing Equity from a Company
Removing equity from a company reduces the value of the company without affecting its operating assets. The proceeds from pulling the equity of the company reduces the value of the company, but does not affect the overall structure of the company. In an equity strip the value of the company is reduced, but not the operation of the company. For example, the company could use its inventories as security for a bank loan and the proceeds from the loan are then loaned to the company owners. Each of the owners would then take some of the protective steps described above for individual protection.
Sale And Leaseback of Company Assets
This strategy is often used by professionals such as doctors, dentist, and others who deal with patients. Assume a procedure goes badly and a doctor is sued for malpractice. The lawsuit puts the real estate, equipment, and the assets of the practice at risk. An alternative strategy is for the doctor to create a separate entity such as a limited liability company or limited partnership holding all the equipment and the real estate, and the company leases back the equipment and real estate to the doctor’s professional corporation. As a result the doctor’s malpractice insurance would be at risk, but the real estate and equipment would not be at risk.
Plan Ahead Before It Is Too Late
With asset planning many of the options used require that they be planned for and implemented in advance of any legal challenge. Once a legal challenge is on the horizon there are very few planning possibilities that still exist. In fact, many planning options will no longer be available, especially in light of the Fraudulent Conveyance Act all options may be foreclosed. Once you’ve been sued you’ve already lost.
There’s nothing wrong with proper planning to protect your assets as long as there is no storm on the horizon. Therefore, business owners need to structure their assets to make those assets less valuable to a judgment creditor and structured so that you do not own the assets outright. You must plan now before something happens and it is too late. Remember it wasn’t raining when Noah built the ark.
Russ Pike is an engaging speaker, author, and passionate estate and elder law attorney. Russ is known for understanding his client’s needs and explaining complex areas of the law in a way that non-lawyers understand. Russ helps his clients by providing strategies and plans that will not only minimize taxes and protect assetsbut will also ensure that wealth is transferred to the person intended. Russ works closely with families to minimize the occurrence of those situations you have heard about where family members are at each other’s’ throats over their inheritance. Russ is the author of two books, “Estate Planning for the Not Yet Wealthy” and “I Wasn’t Ready Yet! Survivor’s Guide to Handling a Loved One’s Estate.”
If you would like to learn more about the planning options available to you to not only transfer your assets as intended,but to protect your assets from preditors, creditors, divorce, and friviolus lawsuits, pick up the phone and give Russ a call at 503-888-0952 to schedule a free consultation. During the consultation, which usually cost $295, you will have all your questions answered and receive at least one actionable strategy that you can implement.
Your company may doing well, but something could happen within the next few days that could change your whole life or even the existence of your company. Studies show that “approximately 70% of family owned businesses fail to make a successful transition into the second generation.” Great damage can be done if one of the owners of your business becomes incapacitated or dies. Similarly, if the company either fails financially or is involved in a major lawsuit, you will find it extremely difficult to provide for your family.
If you want to solve your succession planning problem you must take the following steps.
- Consult with your financial and legal advisers to determine how much of your wealth is in your business;
- Determine your goals for the business;
- Design a proper plan to ease the transition for your partners, your employees, and your family;
- Hire a skilled, experienced business valuation expert to identify areas of transferable value within your business;
- Determine the best valuation method for your type of business;
- Put together your succession planning team which should include your tax, legal, accounting, financial and exit-planning advisors; and
- With input from your advisor team explore all of the viable options for business succession that may be appropriate for your business.
If you want to learn more about both your personal estate planning options, your business succession strategies, how to protect your assets, and fund your retirement, go to my website, www.Pike-Legal.com and review the articles on my blog as well as answers to the most frequently asked questions.
The key to successful succession planning is to start now. When you have adequate lead time before retiring. By starting your succession planning early you can develop a plan that will maximize you net proceeds and provide a more comfortable retirement with less family conflict. Why risk losing all you have worked for? Don’t procrastinate, Remember, it wasn’t raining when Noah built the Ark.