Building assets involves hard work. Typically, you would expect that the assets you’ve accrued through business and hard work shouldn’t be under any risk from future liabilities, lawsuits, and creditors.
But that is not usually the case.
According to data, about 20 million lawsuits are filed annually. One in four of these involve debt collection. Creditors can be ruthless when recovering their lost assets. However, you shouldn’t let yourself be at their mercy. Asset protection is your security blanket. Here is what you need to know about asset protection and why you should set one up to protect what you’ve gathered from years of hard work.
What Is Asset Protection
Asset protection is the adoption of various strategies to protect one’s wealth. It is an essential component of financial planning and ensures you have a safety net against claims from creditors.
Individuals and businesses use asset protection to limit the access creditors have to various crucial assets while staying within the bounds of the debtor-creditor law. Therefore, your most valuable assets remain untouched in case of seizure, taxation, or other losses.
Asset protection strategies are legal and the best alternatives over fraudulent practices such as contempt, concealment, tax evasion, fraudulent transfer, and bankruptcy fraud that an individual or business may use when desperately trying to evade creditors.
Factors That Determine Asset Protection Strategy
Several factors determine the degree of asset protection needed for a business or individual. Asset protection planning analyzes these factors to develop the best asset protection strategy.
The primary factors that determine the degree of asset protection required include:
What kind of industry you are in and what you do for a living
Who is a part of the business
What kind of earnings or revenue are you expecting
What your role is in the business
Do you have any licenses or Intellectual Property to protect?
What type of assets do you want to protect
Nature of the asset
***Regarding nature of the asset, several types of assets are exempted from creditor claims. For instance, a homestead exemption protects homeowners from being forced to sell their homes to repay debt.
What are the Various Asset Protection Strategies?
Over 40 Million lawsuits are filed every year in the USA with an additional 1 million attorneys joining the workforce every year!
– U.S Financial Education Foundation
In essence, this means that you must always remain vigilant, and take the necessary steps to protect yourself from potential litigation.
There are three key asset protection strategies. They include:
Using Limited Partnerships (LPs), Corporations, and Limited Liability Companies (LLCs)
The government protects owners of limited liability companies, corporations, and limited partnerships through limited liability laws. Typically, individual owners of such entities are exempted from the organization’s debt.
Therefore, you can use such businesses to borrow credit and protect your assets from seizure. However, using this strategy to protect personal assets is often deemed unethical. Several U.S. laws allow creditors to permeate LLCs and corporations in special cases and hold the individual liable.
Asset Protection Trusts (APTs)
This is one of the strongest methods of asset protection. An asset protection trust works like a bank trust that holds assets at the discretion of the settlor. These assets are not legally entitled to the owner. Instead, the owners are beneficiaries of equitable interest in the assets.
Asset protection trusts offer asset protection without breaching tax evasion laws.
Transferring Property Rights
An individual may transfer the legal right of their asset to a trusted friend, spouse, or relative to protect it from creditors. Therefore, the debtor can still possess their asset without the risk of losing it to creditors.
However, there’s a risk of conflict if they sever ties with the person they transferred the asset’s ownership to.
When Should You Initiate Asset Protection?
You can initiate asset protection at different times. However, You must set up your structure prior to a lawsuit in order to protect your assets.
Initiating asset protection early helps prevent a fraudulent ruling since it’s a civil case, not a criminal one. You also get reasonable negotiation leverage, ensuring a favorable outcome from the lawsuit or claims.
Asset Protection and Real Estate
Real estate asset protection uses the same principles as other assets. Typically, you’d employ the following three strategies to protect your real estate from creditors:
1. Having the property under tenancy by the entirety – meaning you jointly own the property as a couple, thus one’s debt cannot give the creditor authority to seize the property unless you’re both in debt to the same creditor.
2. Creating an LLC
3. Having the property in someone else’s name
Limited Liability Limited Partnership
A newer kind of entity called LLP, protects the general partner from personal liability for the debts incurred by the partnership. This entity has a protective barrier of setting up multiple layers of entities in a simpler, more refined approach.
When your business enterprise becomes a limited liability limited partnership, you can always rest assured knowing that the only assets you are risking are the assets that you invest in your business.
Family Limited Partnership
A family limited partnership (FLP) is a limited partnership that only contains members from the same family.
One of the biggest and most favored advantages of our FLP’s is the tax benefits. If a family member chooses to purchase both a general partnership interest and a limited partnership interest and they transfer these limited partnership interests to other members of their family, the transferring party gets to reduce the taxable value of their estate. This ensures complete control over the management and investment decisions of your company, and the transferees, who are not granted authority to make decisions regarding these matters. This could make others able to take advantage of valuation discounts when the transfer is complete.
Protection for My Real Estate
Real estate can be a valuable investment, but often is accompanied with both risks and liabilities. If your properties are titled to a person rather than a business, you are then personally liable for any form of damage and loss regardless of where they come from (i.e. accidents, injuries, etc.).
If any of your properties are involved in any kind of lawsuit, your personal assets are at risk. This could include anything from cars, to your house, your bank accounts, or other real estate investments you own.
Nevertheless, there are ways to protect your assets by placing your properties in business entities in order to create a protective barrier between you and the owned assets. This ensures that it becomes far more difficult for a judgment creditor to hunt your assets in any lawsuit that could involve your investment property.
Protection for My Business Equity
An asset protection planning strategy that can limit liability risks, is the use of holding and operating companies. The ideal business structure has an operating entity that owns no vulnerable assets while the holding entity owns the assets of the business. Within this structure, small business owners could eliminate or significantly limit the liability of both the personal and business debts.
Asset Protection For Medical Professionals
True risk for your practice is putting all your eggs into one basket. So, what is a realistic solution for this issue of putting all your resources into one entity? It could be something as simple as using a few different baskets and entities. It is actually quite common amongst business personnel to use a few different outside entities. By using many different entities, you can turn your business into a protective one that shields the assets from any claims. If one of the entities does not do well or ends up with a lawsuit, the owner should not need to be held responsible. Doctors and medical professionals have the opportunity to follow suit for the same reasons as business professionals.
Turn to the Right Professionals to Legally Protect Your Assets
Asset protection is the best way to legally keep your hard-earned wealth safe from creditors if they threaten to file a lawsuit or seize it. Contact a trusted professional today and learn how to secure your wealth from future risks.
Which Business Entity Is the Best Choice for Me?
Businesses vary according to their goals, costs, investor interests, risk tolerance, and financial standing. There will never be one perfect choice for everyone when it comes to the best entities to use for your business. The options vary from anything from sole proprietorship which provides no protection for personal liability, to a complex choice with multiple layers of business entities and provides maximum personal liabilities and anything in between.
Business in Nevada
Nevada legislature has pushed for the creation of a business-friendly legislature for years in order to make it a more attractive state for businesses looking for tax advantages and laws that promote their business rather than smother it. Fortune magazine stated that “Nevada’s attraction is that it has one of the lowest costs of doing business in the West” therefore making it one of the best states in America for business.
Business structures have a significant impact on various aspects of a company, including liability, management, taxation, and capital raising. Limited Liability Companies (LLCs) provide liability protection for members while allowing for simplicity and flexibility in management. C-Corporations (C-Corps) offer limited liability for shareholders but are subject to double taxation, making them more suitable for larger, publicly traded companies. S-Corporations (S-Corps) pass income, deductions, and credits through to shareholders to avoid double taxation while still providing liability protection. Partnerships involve two or more owners who operate a business together and have their business income taxed at individual tax rates. Series LLCs allow for multiple cells within a single company, each with its own liability protection and tax planning options. Ultimately, the choice of structure depends on the specific needs and goals of a business.
Limited Liability Company
LLCs (Limited Liability Companies) are a type of business structure that combines the liability protection of a corporation with the simplicity and flexibility of a partnership. Members of an LLC are not personally responsible for business debts or obligations, meaning their personal assets are protected.
LLCs are often preferred by small business owners and startups as they are easier to manage and have fewer formalities compared to corporations. In terms of taxes, LLCs have the option to be taxed as a sole proprietorship, partnership, or corporation. This flexibility in taxation makes LLCs a popular choice for small businesses.
C-Corps, or C Corporations, are the most common type of corporation. They are separate legal entities from their owners, meaning shareholders have limited liability and are not personally responsible for the company’s debts or obligations.
C-Corps are taxed as separate entities and any profits are taxed at the corporate level before being distributed to shareholders as dividends. This double taxation can make C-Corps less attractive for small businesses, but they are often preferred by larger, publicly traded companies because they offer a wider range of options for raising capital.
S-Corps, or S Corporations, are a type of corporation that has elected to pass corporate income, deductions, and credits through to their shareholders for federal tax purposes. This allows the company to avoid double taxation on the corporate income.
S-Corps have the same limited liability protection as C-Corps, but they are subject to more restrictions, such as having no more than 100 shareholders and only allowing certain types of shareholders. In terms of taxes, S-Corps are only taxed once on their income at the shareholder level, which can provide a tax savings compared to C-Corps.
Partnerships are a type of business structure where two or more people own and operate a business together. In a general partnership, each partner is personally liable for the business debts and obligations. In a limited partnership, there are both general and limited partners, with the latter having limited liability.
Partnerships are often preferred by small businesses because they are relatively simple to set up and have fewer formalities compared to corporations. In terms of taxes, partnerships are pass-through entities, meaning that the business income is passed through to the individual partners and taxed at their individual tax rates.
Series LLCs are a type of LLC that allows a single company to create separate series or cells within the company that have their own liability protection. This means that each series can have its own assets, income, and debts separate from the others, and the liability of each series is limited to its assets. planning.
Series LLCs are often used in real estate investment, where each property can be managed as its own separate series. In terms of taxes, each series of a Series LLC can be taxed as a separate entity, or the entire Series LLC can be taxed as a single entity, providing flexibility in tax