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Asset Protection Planning

Asset Protection Planning > Overview
Now that you are familiar with the most important asset protection and estate planning concepts how do you create the best plan? Protecting what you have from liability and preserving your estate for your family involves many new concepts for you and it’s not always easy deciding where to begin.

In this section, we will present a summary of the issues and options available—techniques to think about to frame the building of your overall plan. This is the approach we use with our clients to analyze their particular needs and to build an efficient program for asset protection, estate planning, and tax savings.

Reduce Your Lawsuit Exposure
You should make sure that you conduct your financial affairs in a manner which will minimize your exposure to lawsuits. There are plenty of real dangers out there which you cannot control. But some of the most troublesome sources of liability can be significantly reduced through sound business planning.

Right Business Entity Choice
We’ve seen that a professional practice or the business you own is a Dangerous Asset. Every patient or customer represents a potential liability—threatening whatever savings you have accumulated.

A Limited Liability Company (LLC)—when permitted by state law—is generally the most convenient and flexible format. The LLC avoids many of the tax problems and the maintenance expenses associated with corporations. The law effectively insulates the owners of the company from any liability produced by the business. Personal assets are not subject to the risks of a business operated within the LLC.

In most states, physicians and some other licensed professionals cannot shield themselves from liability with either an LLC or a corporation. In order to protect the family home and savings, an alternative route is needed. If you can’t limit your personal exposure to claims, use a strategy such as a Family Limited Partnership (FLP), an LLC, or a trust, which will protect the assets themselves. That way, even though you can be sued—it won’t be worthwhile for the plaintiff to do so.

A professional practice that cannot be conducted as an LLC should be incorporated. Although the corporation does not offer protection from malpractice claims, it can insulate you from many other types of business risks. When you use a corporation, you are not responsible for corporate obligations unless you have given your personal guarantee. Also, you will be shielded from most types of claims from employees, suppliers, and landlords.

If you have other partners in your professional practice, you can limit your liability for claims arising from their negligence by separately incorporating your practice. Your corporation would be a partner with each of the other corporations and you would not be responsible for claims against the others.

Since a corporation is a taxpaying entity, you will have to plan for eliminating a potential double tax on corporate earnings. This can be accomplished by using an S Corporation or by zeroing out corporate income through salaries to officers. To ensure that the corporation will be respected for legal and tax purposes, the corporate formalities of minutes, bylaws, and stock certificates must be observed. All of your dealings with third parties should be conducted in the corporate name, and a separate corporate bank account must be used.

Avoid Business Partnerships
You should never enter into a business partnership with anyone. These types of partnerships can produce huge liabilities for you which are totally unexpected and not your fault. As a co-general partner you are responsible for all partnership debts and any negligent acts of your partners. A business partnership expands the scope of your personal liability when you should be trying to limit your risks.

Never Give Personal Guarantee
Much of the protection which can be accomplished with a corporation will be lost if you give a personal guarantee of a corporate obligation. Many of the problems which we see in our practice are caused directly by needless guarantees for corporate loans and leases for business ventures which were not successful.

We have found, in our practice, that a lender or a lessor will generally not require a personal guarantee if he or she can be persuaded that the business or proposed venture is sound. These days, lenders are anxious to make good loans and lessors want to lease empty space. If you cannot convince them that your company is going to be successful and that they should rely solely on the business for payment, you should not enter into a deal with them.

If you get turned down too many times, perhaps you are not being realistic about your prospects for success. Maybe your business plan is not really as good as you think. If you sign a personal guarantee, you are placing all of your assets at the mercy of a particular business deal and you are undertaking a risk with odds much worse than those offered in most gambling casinos.

Use Multiple Entities
Those who have more than one type of business should use different entities to conduct each facet of the business. The goal is to insulate each separate business from liabilities produced by the other activities.

Physicians operating more than one clinic should never hold ownership in a single entity. Similarly, if you own several real estate properties, use different entities to hold each one. If there is a lawsuit in connection with one of the properties, the others won’t be endangered. The same logic would be applied if you owned properties and also performed property management services for others. You would want to separate the management business from the ownership of the properties.

As a general principle, the ownership of Dangerous Assets, those with a high risk of producing liability, should always be separated from Safe Assets, such as cash or securities. These Safe Assets should not be jeopardized by a liability associated with your business or other Dangerous Assets which you own.

For example, a client of ours owned a restaurant and had substantial retirement savings in the bank. If he was sued because of a liability in connection with the restaurant, his retirement savings could be lost. Instead, merely by putting the restaurant in an LLC, we removed the Dangerous Asset from his legal ownership. Then, any lawsuit against the LLC, which owned the business, would not place his other assets at risk.

Use Family Limited Partnership to:
Discourage Lawsuits
A Family Limited Partnership (FLP) will provide you with four significant advantages that cannot be obtained through any other vehicle. The first advantage is that the FLP can discourage lawsuits. Assets that are protected in the Family Limited Partnership cannot be seized by a judgment creditor. It is unlikely that someone will want to sue you if they do not believe that they will be able to collect a judgment.

Protect Assets
The most valuable feature of the Family Limited Partnership is the ability to protect and shield assets from potential claims. The law is well-established that a creditor of a partner is not permitted to seize assets of the partnership to satisfy the debt. That means that business interests, savings, and investments may be safely insulated from potential liabilities in this manner. This excellent result will not be accomplished if a creditor is able to obtain a charging order, foreclosure or seizure of your ownership interests in the FLP. Limited Partnership interests should be held by children, or trusts specifically designed for ownership purposes. This technique will preserve and may significantly enhance the available level of asset protection.

Use Trusts for Advanced Plans
Trusts can be designed to compliment and enhance the asset protection, estate planning, tax saving, and privacy goals which you have. The following is a summary of a few of the trust options available.

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