In the first part of this series we discussed different strategies entrepreneurs can use to protect their business and personal assets. Here, we’ll look at two final ways entrepreneurs can achieve asset protection.
No matter what line of business you are in, the reality of being a successful entrepreneur is that you open yourself up to a number of unique risks—and the more successful your business is, the more risks you face.
Asset protection planning is intended to reduce or eliminate the risks of being in business by shielding your business and personal assets from litigants, creditors, and other potential threats to the fullest extent legally possible. It’s crucial to have asset protection strategies in place from the moment you open your doors, because once a claim or lawsuit is filed, it’s too late. If you try to protect your assets after a claim or lawsuit is even threatened, you could be at risk of being charged with fraud. So take action now, while there is nothing to worry about and many ways to protect your assets.
We previously discussed how you can use business entities and insurance coverage to protect your business and personal assets from common threats all companies face. Here, we’ll look at three additional strategies you should consider implementing when developing a comprehensive asset-protection plan for your business.
Although using proper contracts and other business agreements might not seem like a major priority for asset protection, the value of these documents should never be underestimated. Indeed, these agreements are designed to protect your company’s most essential elements: your personal liability, personal and professional relationships, intellectual property, and trade secrets, to name just a few.
In addition, legal agreements govern the rights and responsibilities of every party you do business with, from clients and vendors to employees and contractors. Given the importance of such documents, you should never rely on generic legal forms you find online when creating your business agreements. Instead, allow a trusted advisor to support you in creating, reviewing, and updating your company’s legal documents to ensure you have the most robust legal protections in place at all times.
In all cases, you must enter into legal agreements in the name of your business entity, not in your personal name. And be sure that your legal agreements include provisions requiring conflict resolution through mediation and arbitration, whenever possible, before litigation.
What’s more, in certain cases, the terms of your business agreements can be drafted to limit the level of liability and potential damages your business would face should a contractual dispute arise. That said, when it comes to limiting liability through contracts, state laws vary widely, so your agreements should be drafted and reviewed by a licensed business attorney.
If you’re looking for the maximum level of protection, you may want to consider using specially designed trusts to safeguard your business. Such trusts are set up so that your business is owned by the trust, not you; and, since you can’t lose what you don’t own, your company and its assets can’t be reached by creditors or lawsuits.
These asset-protection trusts are not the same as living trusts designed to protect the inheritance you want to leave for your family from the court process called probate in the event of your death or incapacity. Living trusts are revocable, meaning you still own the assets held by the trust while you’re alive, and as such, you can dissolve the trust or change its terms during your lifetime. Because you still retain ownership of assets held by revocable living trusts, a revocable living trust does not provide you with any asset protection from creditors. Asset protection trusts, however, are irrevocable.
The most airtight protection is provided when you never own your business to begin with, and when the business is started by you as the trustee of an irrevocable trust set up for you by a parent or grandparent. And if you anticipate growing the value of the business significantly, this kind of trust setup can also provide extremely valuable estate tax protection. The one hitch here is that you have to have parents or grandparents who thought ahead and left you an inheritance inside an irrevocable trust at their death, or who are willing to set up an asset protection trust for you during their lifetime, so you can start your business with this airtight protection.
If you already have an ongoing business that you want to protect using asset protection trusts, you can transfer your business into a creditor-shielded asset protection trust, but there are many restrictions, and your protections will only begin after several years, depending on the state in which the trust is established.
The The Bridge Trust ® is a breakthrough Asset Protection concept which “bridges” the best features of the Foreign Asset Protection Trust (FAPT) yet is even easier to use and maintain than the Domestic Asset Protection Trust (DAPT).
The Bridge Trust ® is a fully registered Asset Protection Trust with a certificate of registration from an offshore trust jurisdiction right from day one. The foreign Trustee is also in place from Day 1, and the due diligence is done on the client right up front, when it matters and when waters are calm. The Trust is then stepped back into the US for tax purposes and from the perspective of the IRS is considered a simple domestic grantor Trust.
What this means is that the client may be the Trustee, the Trust does not need a separate EIN number, it can use the client’s social security number, and the Trust need not file a separate tax return or any foreign trust compliance forms. The net effect is that the Bridge Trust ® is as easy to use and maintain as a typical Revocable Living Trust – Except if there is ever an “Event of Duress”, the foreign Trustee may be activated by declaration of the Protector and the Trust jurisdiction can be fully moved offshore with all of the protections of a full FAPT, with an inception date of when the Trust was established, not when it becomes foreign!
To ensure these strategies are put in place and maintained properly, having an experienced business lawyer on your advisory team is a must. This person should be able to help you develop, implement, and enforce a full array of asset protection strategies at every stage of your company's evolution, including an analysis of your business' current risk exposure, to help ensure that your company’s legal foundation is strong enough to withstand whatever threats you might face.
This article is a service of Davidek Law Firm, PLLC. We don’t just draft documents; we ensure that families and business owners make informed and empowered decisions about life and death, for themselves and the people they love.
This article is a service of Beverly R. Davidek. I don’t just draft documents; I ensure that families and business owners make informed and empowered decisions about life and death, for themselves and the people they love.