Walnut Creek Asset Protection Planning Lawyer
Additional Information
Business owners, which include owners of rental property and self-employed individuals, must not only plan for their succession, they must carefully structure and conduct their businesses to achieve all of their goals: continuity and survivability of their business, preserving and protecting their wealth and minimizing estate taxes. An estate plan that simply transfers wealth on death is of little value if no steps are taken to protect and preserve that wealth during life. A well-planned business asset protection strategy is equally important in protecting the business owner.
Asset Protection
If you or your business becomes a judgment debtor as a result of a lawsuit, your judgment creditor may go after your business and personal assets to collect the judgment. The goal of an asset protection plan is to make your assets difficult for creditors to take, so that they will either go away or negotiate. It is very important to remember that your asset protection plan must be commercially reasonable. If you attempt to implement a plan that protects 100% of your assets from all creditors in every scenario you may end up with no protection, because a judge will throw the whole thing out. By utilizing various legal entities to own your business and other assets you can legally and effectively increase the degree of difficulty that a judgment creditor would have in collecting on his judgment. This gives you leverage to negotiate and thereby reduce the amount of loss you suffer.
Important Questions
1. Are you conducting your business in a limited liability entity, such as a corporation or LLC?
-If not, if you own your business with another person, your personal assets could be reached by a judgment creditor of your business as a result of your business partner’s mistake.
-If not, if you have employees, your personal assets could be reached as a result of your employee’s mistake
2. What is the appropriate entity for your business?
-If you will have employees, the tax treatment ofemployee benefits is often more favorable for corporations.
-If your business is more passive, such as the ownership and rental of real estate, an LLC, which is generally less formal and cumbersome to administer, may be more appropriate.
-If you are concerned about protecting your business assets from your activities outside of the business, it may be wise to build an LLC into the plan. A judgment against you personally can reach all of the assets that you own personally. If your business is a corporation and you are ashareholder, your judgment creditor can take your shares. You may find yourself working for your creditor. On the other hand, if your business is an LLC and you own an interest in the LLC, your judgment creditor cannot take your ownership interest. An LLC is treated like a partnership for purposes of enforcement of judgments. This means that a judgment creditor can only get a “charging order,” which entitles him to receive any distributions that are made to you as a result of your ownership interest. If no distributions are made, he gets nothing.
3. Is your business a type that should be conducted through multiple entities?
-If your business consists of several functionally discrete components that have different levels of riskiness, you may want to separate the different functions in a way that separates assets from potential liabilities.
EXAMPLE: Your business is a bus company. You purchase buses on which you transport passengers. You could conduct this business as three separate entities, as follows:
Entity F = Finance entity
Entity L = Leasing entity
Entity B = Bussing entity
F lends money to L so that L can buy buses. This is a commercially reasonable transaction, the loan is for 80% of the value, the other 20% is L’s down payment. F takes a lien against the buses to secure the loan, leaving L with only 20% of the equity. L pays off the loan from F over time.
L then leases the buses to B so that B can run its bus business. B takes in cash from the passengers, which it uses to pay employees and to pay L its lease payments. L, in turn, uses this cash to pay off its loan from F.
If a bus driver caused an accident the injured person would sue the driver and B, his employer. He could recover against B’s insurance policies and whatever little cash B has, but he would not likely be able to sue L, which simply leased the bus to B, or F, which has no relationship with B. And F is where all of the assets are.
Business Succession Planning
What will happen to your business if you become disabled or die? Your goal is a smooth transfer that enhances the likelihood your business can continue on in the next generation and provide security for your survivors. How can this happen if you are the only one who can run your business or if your estate is so large that your business must be liquidated to pay estate taxes?
Important Questions
1. If you have a business partner or partners, have you implemented a plan for what will happen to your share of the business in the event of your death or disability?
-Every business owned by more than one owner needs a Buy/Sell Agreement. In this agreement the owners can agree what happens to an owner’s share of the business if a) he wants to sell and retire, b) he becomes disabled, c) the other partners want to kick him out, or d) he dies. There is a wide range of possibilities available here. Business partners can agree to just about anything that is not illegal. For example:
–Partners can only sell their shares to each other, not to outsiders
–If a partner dies, his share must be purchased by the company (or may be purchased at the company’s option or at the heirs’ option)
–Any buy-out of a partner will be done by an installment sale (or lump-sum payment)
–A partner who is unable to participate in the business for a defined period (such as 60 days, 120 days, etc.) is considered disabled and must be (or may be) bought out.
–The company will buy key man insurance to enable buy-outs
2. If you leave your business to your children, will it survive? A sad but well-documented reality is that a very large percentage of family-owned businesses fail in the second generation, and by the third generation very few still exist. Consider:
-Do you need to hire an outside CEO to facilitate the transition?
-Is one of your children capable of running the business better than the others?
-Are your children even interested in running your business?
-Can you leave your business to the one child capable of running it and still have enough other assets to be fair to the other children?
-Are you leaving your business to your children in a structure that will be safe from their creditors?
3. Do estate tax considerations indicate that a plan for moving shares of your business to your children during your lifetime would be prudent?
-Assets moved out of your estate while you are alive will not be subject to estate tax on your death.
-You can move assets to your children by gifting, either in one large gift that uses some or all of your lifetime gift tax exclusion amount (currently $1,000,000), or in annual gifts that take advantage of your annual gift tax exclusion amount (currently $12,000 per recipient).
-You can leverage these gifts by taking advantage of the discount that applies to partial interests. For example, if you own 100% of your LLC, your ownership interest is worth 100% of the value of that LLC. But if you give 20% of the LLC to your children, your 80% is not worth 80%, because you cannot sell that 80% to a third-party buyer for that full value. Nobody would pay that full value if they had to share ownership with another person. Thus, your 80%, and therefore your children’s 20%, get discounted, possibly by 25% or more. This means, in this example, if your LLC is worth $100,000, and you want to give away 20%, that $20,000 gift would be discounted down to $15,000 for purposes of calculating the size of your gift and whether or not it is subject to gift tax.
-The added benefit of such gifting is that any increase in the value of the gifted asset (capital gain) belongs to the recipient (your child) not to your estate, thereby reducing your estate tax burden even further.
-Gifts can be made outright or into a trust. A trust can give greater protection from your children’s creditors and also can allow parents of even young children to commence a gifting program.
Call 925-943-2741 to discuss your case with an attorney.
