You’ve spent years building your business and accumulating assets, but what are you doing to protect them?
An outside adviser can help you take the proper steps to avoid the many risks to which you’re exposed, says David Musser, a partner at Nichols Cauley & Associates LLC.
“A CPA can help you evaluate not only the tax consequences of your various ventures but also how your specific structure provides for maximization of asset protection,” says Musser.
Smart Business spoke with Musser about the steps you can take to protect your assets.
What is asset protection?
Asset protection is the set of legal techniques that individuals and entities use to protect their assets from civil money judgments. The goal of this planning is to insulate assets from creditor claims without tax concealment and tax evasion. Asset protection planning should be incorporated into both estate and tax planning and should be well diversified. In addition, using limited liability entities and trusts for protection yields a portfolio of wealth that is well protected from a variety of risks.
Timing is everything. By implementing a variety of asset protection strategies now, you can ensure that your wealth is protected before it becomes threatened.
What is the first line of defense in asset protection?
Insurance is the first line of defense against liability lawsuits. Attain coverage on personal assets, such as automobiles and houses, as well as business and rental real estate assets. Coverage should include liability, covering damages caused by you; property protection coverage, which covers sudden and accidental damages; and additional protection, such as umbrella coverage over your homeowner’s policy. But while liability insurance will give you a layer of protection against the loss of assets, it is not sufficient on its own to provide an effective protection plan.
What is the role of homestead protection?
The statutory homestead protection is a strong tool in asset protection planning, especially in those states that offer unlimited protection. The principal residence is often one of the most valuable assets needing protection against creditors, and there are a variety of homestead exemptions offered by the state of Georgia. However, there are limitations: The protection does not extend against federal and state liabilities and it only protects the primary residence, leaving vacation homes exposed.
How can family limited partnerships help protect assets?
Family limited partnerships can be formed to hold a family business or investments and, when used correctly, can be very powerful estate planning and asset protection tools. Not only do the limited partnership interests have the ability to receive significant discounts for estate and gift tax purposes, they may be subject to charging order protection in various states. This keeps the partnership interests and assets safe and potentially out of creditors’ reach.
The family limited partnership is a good solution for the very wealthy; those facing imminent problems, be they legal, financial or medical; and those with jobs that face a high risk of liability, such as in finance, law, construction or medical.
What other strategies are available?
The qualified personal residence trust is the most popular strategy for protecting a personal residence from claims. All of the advantages of home ownership are preserved under this strategy, and the family limited partnership can be designated the beneficiary of the trust, allowing for greater protection.
In addition, retirement accounts can also provide protection of assets. ERISA-qualified plans provide nearly absolute federal law protection against creditor claims, while IRAs offer only limited creditor protection. In addition, nearly all retirement funds are exempt assets in bankruptcy, although protection for IRAs and Roth IRAs is limited to $1 million.
Finally, asset protection trusts are irrevocable, meaning that they cannot be modified or terminated with beneficiary permission. The grantor essentially removes his or her rights of ownership of the assets. There are, however, more sophisticated trusts that may be established, which are deemed grantor trusts, allowing you to retain control over the assets.
What steps can a business owner take to protect both business and personal assets?
It is important for businesses to create a strategy that sufficiently protects personal and business assets from liability arising from lawsuits and business slowdowns. Failing to do so in an effective and timely fashion could create exposure to creditors, taxing authorities and courts.
As a result, the legal structure of the business is a key consideration when creating an effective asset protection plan. Several entities, such as corporations, LLCs and LPs, provide different levels of protection, and by using one or more of these, individuals can conduct business and continue to shield personal assets from claims against the business. Offshore entities can offer strong protection, but you must seek professional guidance due to the complexities involved.
In addition, these strategies also allow business and real estate assets to be protected from claims against individuals within the business, so it is important to separate liability-generating assets from one another in order to lower exposure risk of the overall asset profile.
By being proactive about protecting your assets, you will ensure that your exposure is minimal should any of the potential risks materialize.
For legal advice on the topic of asset protection, please consult with your attorney.
David Musser is a partner at Nichols Cauley & Associates LLC. Reach him at (800) 823-1224 or [email protected].
