We live in a highly litigious society in which people can be the recipients of lawsuits whether they are at fault or not. If, for example, a friend of your daughter’s borrows the family car and accidentally accelerates when she was intending to brake in a parking lot, the resultant crash through a storefront window could leave you open to a lawsuit because you owned the car. You could be sued for resulting injuries, deaths, and property damages.
Potential legal damages are not limited to personal ownership, of course. If you own a building with multiple offices, someone can tumble down the stairs because of a spilled cup of tea and hold you liable for their injuries even if the tea was spilled just 5 minutes ago and you were 200 miles away. You might be on the receiving end of a lawsuit for medical bills, physical therapy, special accommodations, adaptive construction on the plaintiff’s home, and more.
As you can see from the examples above, both your personal and business assets could be at risk from lawsuits. This is perhaps even more likely if you have been successful: a large car or house and a successful business may cause attorneys and potential plaintiffs to see dollars signs in events or accidents that would pass unnoticed without the visible signs of your success.
Given the litigious nature of our society, asset protection strategies are a wise risk reduction strategy for everyone, but particularly successful people.
Since you might be sued for your personal assets or your business assets, which is better, personal or business asset protection?
The first thing you need to understand about asset management is that there is no “better.” Asset protection is much like a game of chess, in which you are protecting your most valuable pieces. There is no one right way to play a game of chess; winning moves depend on strategy.
You need to protect both personal and business assets.
It’s also important to know that there are circumstances in which both personal and business assets can be pursued in court. There are internal claims and external claims.
Internal claims are those made by plaintiffs on a specific entity, like a corporation. If someone does slip on spilled tea in a building you own and you are 200 miles away, the plaintiff would likely be limited to pursuing the corporation’s assets, not your personal ones.
In an external claim, the lawsuit is not confined to only business assets but can include personal assets. If your daughter crashed through a storefront, not in a personal vehicle, but one owned by your company, both you personally and the company could be sued.
The Timing of Asset Protection Plans
Before we discuss personal and business asset protection, we need to briefly discuss timing.
The time to put asset protection strategies in place is before you are the defendant in a lawsuit.
Why? Because if you attempt to put asset protection strategies in place after a lawsuit has begun, a court may deem you guilty of what is termed “fraudulent conveyance.” This means that you moved (conveyed) some assets away from being open to plaintiffs with the intent of delaying, hindering, or defrauding them. If a court sees fraudulent conveyance, they can reverse any asset transfers and order them paid to a successful plaintiff (who is a creditor by virtue of the success of their court case).
Dangerous Versus Safe Assets: Knowing the Difference
It’s very important to know a key distinction among assets before examining personal versus business asset protection strategies. There are two types of assets: dangerous and safe.
Dangerous assets are considered to be inherently dangerous by their nature and run more risk of liability as a result. Examples? Motor vehicles, equipment and tools, and commercial property, although dangerous assets are not limited to these.
Safe assets, by contrast, do not have a lot of inherent danger. Bank accounts, stocks, bonds, and precious metals are examples of safe assets.
Safe and dangerous assets should not be commingled.
Personal Asset Protection Plans
There are multiple methods of protecting personal assets.
First, any asset plan needs to take into account your investment and tax planning strategies as well as protecting your assets.
Good liability insurance (home, auto, and umbrella) policies should be the first-line defense for every attack on your assets, but insurance policies are often filled with limitations, exclusions, and exceptions. Proper legal structuring can go far beyond what insurance can protect.
For example, Qualified 401(k) and pension plans serve as good asset protection. By law, they are protected by the Employee Retirement Income Security Act (ERISA), which are generally only subject to capture by the federal government, a divorcing spouse, or unpaid child support obligations.
Traditional and Roth IRAs (Individual Retirement Accounts (IRAs) are exempt from bankruptcy up to $1 million but, depending on your state laws, may be attachable in a lawsuit.
State homestead laws often protect a primary residence, a basic vehicle, and some personal property but these state laws vary so widely it is prudent to consult advisers who are conversant with specific state statutes.
Family-owned Limited Partnerships or Limited Liability Companies (LLCs) are often used to protect large bank or brokerage accounts, investment real estate, or valuable family heirlooms.
Revocable living trusts are wonderful estate planning tools but offer very little (if any) asset protection in most states. Irrevocable asset protection trusts may protect your assets in the event of legal claims, but their irrevocable nature often makes them unattractive for most day-to-day assets.
Protecting Personal and Business Assets: C Corporations, S Corporations, and LLCs
There are also several ways to protect both personal and business assets.
Certain types of corporations may protect personal assets.
Corporations and LLCs can protect the directors, officers, shareholders, members, and managers from personal liability for breaches of contract, corporate debts, or personal injuries caused by the business, its employees, or agents. A plaintiff may pursue damages from the corporation itself, but the personal assets of the principles can be protected.
There are exceptions to this principle if your corporation provides professional personal services, such as medical, engineering, architecture, or accounting services. Licensed professionals may be personally liable for damages attributable to the provision of that service.
Keep in mind that protection from personal liability is provided only if the corporation is separate and distinct from its directors, officers, and principals. Corporate formalities such as proper minutes, annual meetings, separate record-keeping, tax returns, and bank accounts must be maintained for the courts to recognize the distinct nature of your business. if corporate formalities are not maintained, courts are like to attempt to “pierce the corporate veil” and seek the personal asset of the officers and directors of the business.
Finally, the basic rule in asset protection for business owners is to separate the ownership of the major asset from the operation of the business. For example, a pizza restaurant may choose to operate as a Corporation, yet the major assets (building, computers, ovens, vehicles, and equipment) could be held in a separate LLC and leased to the operating business. Should the Corporation get sued, liability insurance may be the only attractive asset remedy to satisfy the injured part.
For more on personal and business asset management, see our webinars, videos, and educational events. We provide educational materials to learn more about your options.