There is a common misconception that if there is an asset protection trust in place, it also protects the assets of the businesses owned by the trust. Although it is imperative to protect individually held assets (often times referred to as Level I planning), that will only prevent unforeseen creditors and liabilities from going after your own personal assets. Whether your company is organized as a corporation, partnership (LP), limited liability company (LLC), or other recognized entity, it can be a potential target of lawsuits and other legal liabilities.
What we refer to as Level II planning goes one step further than protecting just your personal assets. Level II planning also protects the assets of any companies owned by the asset protection trust. Not only is this type of planning imperative in order protect your company from unforeseen creditors and liabilities, but can provide savings on annual premiums paid for liability or malpractice coverage.
But what if I have insurance, do I still need to protect my assets? The answer is yes! The expanding theories of liability and the contingency fee system have led to increased litigation and an increased exposure of liability. For example, if your assets are not protected and you are in a car accident, the other party can go after not only your assets but also your company’s assets for amounts not covered by insurance, potentially leading to detrimental consequences such as bankrupting your business.
There are two common methods when planning to protect your company’s assets. One of these methods is the have the business itself create its own asset protection trust. In doing so, the company settles a trust that is designed to protect the assets with which it is funded. The company is then designated as the sole beneficiary of the trust, and the trust takes advantage of laws that protect the assets from the company’s creditors. Additional provisions may be included in the trust that, under certain circumstances allow distributions directly to the company’s owners if such distributions are in the company’s best interest and are made “on behalf of” the company.
A second common method is to divide the company into multiple entities. In effect, this will have a particular operation of the overall company be performed within a separate entity. For example, suppose a construction company not only provided its services but also owned a number of expensive pieces of machinery and a few office buildings. Without Level II planning, if the company were to be sued, the company, equipment, and real property would all be exposed to liability.
However, these assets would look a lot less appealing if instead the company gave up ownership of the assets and had them be owned by separate LPs or LLCs. Doing so would generally limit creditors to obtaining a “charging order” against the person’s interest. Any liability risk associated with that separate entity’s operation will be limited to that separate entity’s assets. In that case, for example, a creditor of a separate operating entity would not have access to the assets held by another entity, even if the entities have the same owner and related businesses.
There are a number of different methods from which to choose, depending on the specific facts of your situation. The timing of when Level II planning takes place is also imperative in order to avoid appearing as a fraudulent transfer. As with any other type of asset protection planning, Level II planning should be undertaken when a company has no claims pending, threatened, or expected, and when there are no outstanding judgments.