As a business owner, you treasure the fruits of your labor — the valuable assets you built on the blood, sweat and tears shed along your journey.
Asset protection planning involves making prudent decisions today to protect yourself, your business — and your hard-earned assets — from loss due to lawsuits, creditors or bankruptcies. This form of legal planning remains prudent for professionals and business owners, whose personal assets could be at risk due the nature of their employment.
Statistics show that the number of divorces, lawsuits and bankruptcies continues to increase. Horror stories abound about wealth created through a lifetime of work, saving and investing lost overnight when disaster strikes. To protect your assets from seen or unforeseen issues, proper risk management strategies must be carefully considered. Smart strategies include exempting your assets from the claims of creditors, limiting your liability through legal entities and transferring your risk through insurance.
While a Revocable Trust permits you to maintain full control (as Trustee) and have access to all your assets (as beneficiary), an Irrevocable Trust, once created, may prohibit your right to control the trust or have access to your assets.
It is a common misconception that irrevocable trusts, once created, cannot be changed. While that is true of many irrevocable trusts created to avoid taxes (tax reduction or avoidance trusts), it is not true of all irrevocable trusts. An irrevocable trust is a trust you create for the benefit of yourself or others and once created, you, as Grantor, must give up your right to something.
Debtor/Creditor law provides that whatever you can get, your creditors can get. You can have known creditors (i.e., bank/credit card debt) or unknown potential creditors (unforeseen lawsuits, nursing home, divorce). A typical ‘income only’ irrevocable trust permits you to receive the income on your assets, but you must give up your right to your principal. In some irrevocable trusts (asset protection trusts), you can retain the right to change who gets your assets during your life and after your death, and maintain 100% control of your assets until you experience disability or death.
It takes a an experienced attorney to draft the proper irrevocable trust to maximize the protection for you and your family while at the same time minimizing the necessary restrictions put on the trust.
Exempting Assets in Michigan
State and federal laws exempt some of your assets from the claims of creditors. While some states allow you to choose either the state or federal exemptions, in Michigan you must use the state exemptions as federal bankruptcy exemptions are not available.
Once you have identified the protected asset classes available to you under applicable law, it may be prudent to maximize your protection by converting non-exempt assets into exempt assets.
Limiting Liability for Professionals & Business Owners
Many entrepreneurs operate their businesses as sole proprietors rather than through a legal entity, such as a Corporation or a Limited Liability Company. Whether their business is home-based or in the Fortune 500, these business owners are attracted by the informality of sole proprietorship. They also do not want to incur legal fees to create and maintain a legal entity. However, in addition to other advantages, conducting business through a legal entity may offer substantial risk management benefits.
While lawsuits brought against a sole proprietorship are really lawsuits against the owner’s personal assets, lawsuits against a properly created and maintained legal entity are really lawsuits against the entity’s assets. Nevertheless, the selection of an appropriate legal entity is critical for managing your risk.
Transferring Risk with Insurance
When was the last time you reviewed the details of your liability insurance program with your insurance professionals? Are your policies current? Are the coverage limits adequate and are the deductibles reasonable? Have you scrutinized the policies for loopholes? Remember: the fundamental philosophy of any insurance coverage is to pay a premium you can afford to transfer a risk you cannot afford. Take time to understand both the risks you have retained and the risks you have transferred.