Businesses Need Asset Protection, Too

(Image credit: Don Bayley)

Affluent families and high-net-worth individuals have been using asset protection planning since the mid-1980s. Well, guess what? Businesses get sued, too. Yet, when you ask those in the C suite what they are doing to protect their company’s assets from lawsuits, you mostly get a blank stare.

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Small privately held businesses are often most at risk because litigation costs and expenses come out of the owner/executive pockets, not those of many multiples of shareholders.

Sometimes lawyers look to pile on a community of individual plaintiffs to scare the company into a settlement or face years of costly litigation and a drag on company morale.

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The latest twist: so-called “Wage and Hour” disputes. A group of employees bands together, typically through the instigation of a plaintiff lawyer, who then sues the company about some issue surrounding the hours they worked and the wages they were paid.

These cases often start out small. But the plaintiff attorneys then contact many more employees, even past employees, to see if they want to join the “class.” Worse, many insurers are now excluding coverage for these sorts of claims.

What Can YOU Do to Protect Your Business?

If your company has substantial retained earnings and liquid assets, you might be able to create a foreign asset protection trust (FAPT) where the company is both the settlor and discretionary beneficiary of the trust. Absent a fraudulent transfer, once titled in the FAPT and subject to the more protective laws of the FAPT jurisdiction, a subsequent creditor won’t be able to enforce a judgment against the FAPT. This will discourage most lawsuits and encourage the parties to reach a settlement, generally far more favorable for the company than would have been the case had the FAPT not been created.

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Private Retirement Plan

In California, business owners can also create a Private Retirement Plan (PRP), a type of retirement savings plan that, by statutory law, is exempt from lawsuits, even if you have to file for bankruptcy. Qualified plans are generally exempt but require the business owner to comply with complex ERISA and tax laws.

The PRP may be set up as a non-ERISA qualified plan taking it outside of the regulatory scheme and thus, not subject to the more complex rules.

There are few limitations on the amount that may be contributed to non-ERISA qualified plans, because contributions are not income-tax-deductible, yet the statutory exemptions from creditor claims applies. This makes the PRP a useful tool to insure there will be supplemental retirement income for the employer.

More Options Companies Can Consider to Protect Their Assets

Leasing equipment, rather than owning it, reduces a company’s assets on its balance sheet.
Some corporations create separate companies for each brand that they own to reduce exposure.
Creating separate entities for the company’s intellectual property (IP) and then licensing them to the operating company so the IP is not owned by the target of a future lawsuit.
Distributing retained earnings to shareholders and stakeholders so the funds aren’t exposed to business liability. There’s also the option of having the company owned by a foreign asset protection trust so the distributions are not subject to personal liability.

One of the best ways to level the litigation playing field is to place the assets out of reach of future potential plaintiffs or convert non-exempt assets to exempt assets ahead of any future claim. Once this is done, your company won’t be so attractive to litigious plaintiff attorneys who only get paid if they recover assets from the judgments they obtain. Asset protection planning neutralizes this.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jeffrey M. Verdon, Esq. is the lead asset protection and tax partner at the national full-service law firm of Falcon Rappaport & Berkman. With more than 30 years of experience in designing and implementing integrated estate planning and asset protection structures, Mr. Verdon serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives. Over the past four years, he has contributed 25 articles to the Kiplinger Building Wealth online platform.