By Abigail Neal, Arizona estate planning and business lawyer
We all know someone who got in some trouble and lost everything. This may have resulted from a professional liability claim, responsibility for an accident, or unpaid creditors. Whether meritorious or not, defending yourself can be extremely expensive. The limited risk of making a claim against another has created an overly litigious society, ready to sue for any perceived infraction. As a result, asset protection planning has become critical for many people.
Protecting your assets doesn’t meaning hiding your assets. It means working within existing law to get the best possible protection for your assets. In turn, this may make you must a must less desirable target for those who might make liability claims against you.
Asset protection starts with utilizing state and federal law exemptions for things like life insurance, retirement plans, and some types of jointly owned property. These exemptions have limited effectiveness, however, because their protection only applies to specific types of assets. Most people find that they need broader protections and other strategies like forming business entities and creating trusts specifically designed to protect your loved ones against future creditors.
Types of Risk and How to Avoid Them
Knowing the different types of risk can help you and your team of professional advisors determine the appropriate strategies to minimize your risk.
Professionals like doctors, dentists, lawyers, accountants, and sometimes people whose business pertains to healthcare, including skilled nursing facilities and assisted living facilities, are often targeted with professional liability claims. In addition, those who work in construction like architects, builders and developers also have professional liability concerns.
As a general rule, a person can’t limit his or her own professional liability by using a legal device. This is why it is crucial for professionals to carry professional malpractice or liability insurance.
If your business gets sued, what assets could the potential creditor reach? The business assets, obviously, but what about your personal assets? Depending on how you structure your business, your personal assets could be at risk.
A sole proprietor with no legal entity has zero asset protection shielding his personal assets from a potential claim relating to the business. A single member LLC is a much better route, and typically easy to administer.
In a general partnership, each partner is personally liable for claims made against the partnership. From an asset protection standpoint, general partnerships are a terrible idea. Note that verbal partnerships are always considered general partnerships. Other types of partnerships like limited partnerships, limited liability partnerships or limited liability limited partnerships are much better choices as they limit some partners personal liability against claims arising out of partnership activities.
In Arizona, the best option is usually the limited liability company (LLC). With an LLC, no member or manager is personally liable for the debts or obligations of the LLC. As a result, your personal assets could be safe from any claim made against an LLC in which you own an interest.
These risks include potential liability from bad business deals (real estate deals for example) and tort claims (like car accidents, dog bites and injuries on your property). Other potential personal liabilities include liability for unpaid taxes, the actions of a family member that leads to the loss of assets, co-signing a loan for someone who defaults and gets a judgement filed against them. You can purchase insurance like car insurance, homeowner’s insurance, an umbrella policy, etc. to protect against some types of personal liability, but not all. Other than buying insurance, protecting against this type of risk is the most difficult. There are certain planning strategies that can be employed, however they aren’t suited to everyone.
Asset Protection for Heirs
You can design a trust for your heirs that provides better asset protection than any asset protection plan they can design for themselves if they were to receive the inheritance outright for substantially less in fees.
Creating a revocable living trust with an asset protection plan for assets left to heirs can protect assets from the heir’s creditors, predators (ex-spouses and fraudsters), Uncle Sam and the heir himself.
When to Create an Asset Protection Plan
The best time to plan is before a claim arises
Different rules apply depending on whether claimants are currently known or unknown future claimants. Even if there is an existing claim, and sometimes even after a judgment has been entered, there may still be some options available. However, beware that you do not make any fraudulent transfers, which means transferring assets with the intent to defraud creditors and made without full and adequate consideration.
The Planning Process
Since asset protection planning can include a number of different strategies, the best route is to work with a team of advisors, including an estate planning attorney, CPA, financial advisor and insurance advisor. Working with a team of professionals is advantageous in that each professional has a different perspective on what types of asset planning protection can be employed. Although your advisors will likely recognize where you need asset protection planning and recommend a course of action, you should also address any concerns you have with your advisor team.
Here is what you can expect during the planning process:
At your first meeting your advisors will gather your basic financial information and talk with you about your objectives. They will also educate you about how asset protection planning works, how the laws work and what you can expect.
It is imperative that you are honest and forthright when you provide the requested information. However, also be aware that because asset protection planning can involve current concerns about potential risk and/or litigation, it is important to determine early how much and what information you should share and should share with various members of your advisory team. For example, it may be necessary that to preserve attorney-client privilege you do not share some information with non-attorney advisors who could be called later to testify.
After your first meeting, your team of advisors will usually meet without you to discuss your objectives, review various legal and financial solutions and create a solution. Your advisor team will then meet with you again to explain their proposed asset protection plan, including the legal and financial components of the plan, and answer any of your questions.
Have Reasonable Expectations
Most people want a high degree of certainty and assurance about the outcome of their asset protection plan, but there are circumstances that neither you nor your advisors can control. Even so, the end result will almost always be much better than if you had done no asset protection planning at all.
An important component of your plan is to discourage lawsuits and potential claimants. While your advisors cannot make your assets invisible, they can create a structure that will make it far less attractive to go after you instead of someone who has done no planning. This often includes forming business entities, like LLCs, that can protect your personal assets in a suit against your company.
Avoid the liability traps of owning assets in general partnerships or jointly with one or more persons where your assets are at risk to problems another owner may have. Again, a better way to own assets may be through a LLC. This especially includes assets with a high potential for risk like rental property.
Funding the Plan
Once you understand and agree to an asset protection plan, your advisors will work with you to implement the plan. This process is called is called funding. It involves creating a list of your assets and determining where they need to go and how they needed to be titled.
Levels of Asset Protection Strategy
There are numerous asset protection strategies you can use, from basic to advanced, depending on the types of risks you face, your current situation, and the extent to which you are willing and able to go to protect your assets. Implementing your asset protection plan can be as easy as forming a LLC for your business and transferring assets into the LLC. Creating a revocable living trust is also very helpful for protecting assets left to children. Asset protection planning can start to get more difficult and costly when more advanced strategies are employed.
If you are concerned about protecting your assets, call Arizona asset protection lawyer Abigail Neal at (480) 699-7992. We can help you evaluate your situation, help put together a team of advisors and start working on your asset protection solution.
Remember, the best time to plan is before a claim arises.