Los Angeles, Calabasas, Westlake Village, and San Fernando Valley, CA Business Planning Law Firm
Asset protection is particularly important for business owners or professionals whose employment could potentially put their personal assets at risk. This type of planning requires making decisions now in order to protect yourself and your assets from bankruptcies, creditors, or lawsuits in the future. In order to protect yourself and your family from this, you need to examine the following four risk management strategies:
Exempting Assets in California
State and federal laws exempt some of your assets from the claims of creditors. Here is a listing of assets that the State of California has determined a person can exempt from creditors. If you are a California resident, you must use the state exemptions, as federal bankruptcy exemptions are not available for California residents. Knowing what assets are protected under California law is an important first step in developing a comprehensive asset protection strategy.
Asset Protection through Legal Entities
One of the most important decisions a business owner or entrepreneur can make is to create a legal entity to operate their business. Examples of a legal entity include a C-Corporation, S- Corporation, Limited Liability Partnership or a Limited Liability Company. Structuring your business correctly is critical. In addition to providing tax and estate planning benefits, a business entity can protect the business owners’ assets from lawsuits and other business liabilities. Asset protection strategies through legal entities can create an impenetrable barrier between your business risk and you hard earned assets.
Transferring your Risk through Insurance
Another way to protect your personal and business assets is through liability insurance. If your family or business is uninsured or underinsured you are putting your future at risk. Insurance premiums are an affordable way to protect your business and family. Make sure that each year your insurance professional reviews your potential risks, and that your policies are adequate to protect you from those risks.
Using Trusts to Protect Certain Assets
A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats. First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.
Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor ‘steps into the shoes’ of the debtor and can exercise any rights of the debtor. Therefore, if a beneficiary has the right to compel a distribution from a trust it is likely a creditor can compel a distribution from that trust as well.