Limited Liability Update
With the seemingly ever-rising tide of lawsuits, many people are seeking to protect their assets from liability. Some common events that lead people to consider asset protection are: 1) starting a new business, 2) acquiring or expanding an existing business, 3) adding a new driver to their household, 4) making changes to their estate plan, or 5) changes in personal lives, such as divorce or death of a loved one resulting in an inheritance. There are different ways to protect assets. Depending on the particular situation, one or more of the following methods should be considered.
Legal Entities
Forming a separate legal entity, such as a corporation, LLC or limited partnership, is a common asset protection strategy. Most of the focus in this area in recent years has been on LLC’s or Limited Liability Companies. Frequently, these entities are used to insulate personal assets from business risks.
Business owners should definitely consider these entities, especially if they have one or more partners or employees. Sole proprietors and general partners may be held personally liable for injuries or damages caused by their employees and partners. This can mean that personal assets may be lost due to the actions of other people.
In many instances, even solo business owners should consider forming a separate legal entity. This is particularly true if you operate a business with high liability exposure, such as restaurants, transportation companies, and medical providers. This list is illustrative only; there are certainly other businesses with high liability risks.
Forming a separate legal entity is also not without limitations. First, it merely separates business assets from personal assets. Business assets can be reached by business creditors, so the owner’s investment in the business is still at risk. Second, some creditors – such as banks and landlords – may require personal guaranties and thereby bypass the liability protection afforded by the separate legal entity. Third, in some instances forming a separate legal entity may subject the owner to additional taxes, e.g. State franchise and excise taxes.
“Hiding” Assets
This may sound shady or even illegal and in some instances it is. However, there are some perfectly acceptable practices that make assets harder to find. Trusts are often used for this purpose. For example, people sometimes put real estate in a trust. A person bringing a lawsuit may search the public records looking for real estate they can use to satisfy any judgment they receive. If the property is in the name of a trustee, it may be difficult for them to find. Be aware, however, that merely putting property in a trust does not necessarily put that property totally beyond the reach of creditors (although in some specific cases it does); it just makes it harder to find.
Offshore bank accounts are a commonly used way of hiding assets. Again, this may sound shady, but there is nothing per se illegal about opening an offshore account. Of course, using such an account for an illegal purpose, such as tax evasion, is illegal.
In many cases, the secrecy practices and laws of other countries may make these assets very difficult to find. Even if they can be found, the additional legal expense and difficulty of reaching them may discourage creditors from trying.
This method, of course, has limitations, too. First, U.S. bank deposits are federally insured. Foreign deposits usually are not. Second, foreign financial institutions may have minimum balance requirements. Generally, while offshore accounts are not just for the super wealthy, they are not for people of limited means either.
Liability Insurance
A liability insurance policy is a contract in which the insurer agrees to pay certain liabilities of the insured. Most people are familiar with auto insurance and homeowner’s insurance. These policies typically include liability insurance.
While homeowner’s and auto insurance may provide protection from personal liabilities, they may not provide protection from business risks. Business owners should review these policies carefully – or have them reviewed by a professional – to determine if they have protection. If not, the business owner should consider adding additional insurance to cover some or all of the risks associated with their business.
There are several limitations on insurance as a way to protect assets. First, insurance may not be available to cover certain risks. Second, insurance costs money and may be prohibitively expensive in some instances. Third, insurance policies may have technical exclusions or exceptions that are not readily apparent to the insured without a thorough review of the policy provisions. Fourth, insurance typically does not cover the entire risk; policies have limits and deductibles that leave the insured bearing a portion of the risk.
Persons reading this should not act upon this information without seeking professional advice. Receiving or reading this information does not form an attorney-client relationship.
