Are your assets protected?

Filed under: Contributed Columns |

With all the crazy lawsuits that we hear about these days, have you ever wondered whether you have done all that you possibly can to protect the assets that you have accumulated?
That is when it is time to consider asset protection planning, which is the implementation of legal techniques to protect the assets of individuals and business entities from civil money judgments.
Potential liabilities can arise from a number of different causes. For example, if you cause an injury to another, commit malpractice or defame another person, they might have cause to bring an action against you. Or if you sign a contract that contains obligations, such as being a guarantor, your assets might be exposed based on the contract. Worse yet, you might have vicarious liability that comes through ownership or investment in another business or investment.
In any case, it is important to make an evaluation of your personal and business situation, including the types of risks you are exposed to and the value and structure of the assets that you own in order to determine whether there are additional steps you should take to protect your assets from the claims of others.
It is important to do this planning before any liabilities arise, because there is a rich body of law to prevent someone from intentionally transferring assets away from a known creditor.

Is it complicated?

Asset protection planning might not need to be complicated, depending on your situation. The first line of defense for protection is making sure you have adequate liability insurance.
For many, this is the most effective strategy, because the risk is transferred to the insurance company, who then becomes responsible for responding to any claims that might arise.
Another strategy that only needs to be done once is to set up your business with the proper structure. This means doing business as a corporation or an LLC with multiple members, which can be effective in shielding you personally from the liabilities of your business.
These forms of ownership are better than operating as a sole proprietor, single member LLC or as a general partnership, as these structures will not shield you from claims of liability.
Another effective business structure is to put the assets that have value and the operations that create risk in separate business entities. For example, you would own the real estate that your business operates in within a multiple member LLC, while the actual operations of your business, which generally create more risk, might be structured as a corporation.
In addition, personal assets can be protected by investing them in vehicles that are effective in keeping creditors away. For example, 401k and other similar qualified plans used to accumulate retirement savings cannot be accessed by a creditor and are an effective asset protection tool.
Similarly, saving for your children’s college in a 529 plan, also will give you protection for amounts held in the plan.

More complex structures

Depending on the type of your business and the amount of assets you could have at risk, you might still have risks beyond those covered by your insurance policies and the other strategies listed above.
Family limited partnerships can be a way to protect assets if structured properly. Such family limited partnerships are formed to manage and control the assets of the parents. The parents retain a small ownership and control of the partnership, while the bulk of the value is owned by children or other family members.
Another method for protecting assets is to place debt (which might be from a related party) on a particular property so that the total amount of the debt exceeds the value of the property, and then there is nothing left to satisfy the potential claim of a creditor.

Asset protection myths

There are several strategies that have been talked about through the years that are not necessarily effective in protecting assets or are very complex and expensive.
Setting up a Nevada corporation, or from another state, is generally not going to protect assets any better than a Colorado corporation.
Off-shore trusts might be effective for very large amounts of money but are very expensive and complicated to set up. These arrangements consist of transferring control of your assets to a foreign trustee. These structures should only be used for those who have a serious need for protection and are willing to pay for it, both in costs and in convenience of accessing their own assets.
Revocable living trusts set up to avoid probate are not very effective at shielding your assets from creditors.

Don’t wait until it’s too late

The main point to remember is that there are ways to protect your assets, but they must be done before any potential claims arise.
Asset protection planning can become very detailed and intricate. Because of these reasons, it’s important to speak with your attorney or your financial adviser who is aware of all the legal issues and ramifications of any course of action.
Kurt Kofford CPA is vice president of BiggsKofford P.C. He can be reached at kofford@biggskofford.com or 597-9090.