Asset protection is very important for many professionals, businesspeople, and others, and it comes in different forms. It is said that we live in a litigious society, and it is possible to position your assets in a safe manner. We will look at the spectrum in this blog post.
Asset Protection for Business Owners and Professionals
If you own a business or professional practice, you may want to take steps to separate your personal property from the actions of your business. For example, let’s say that you are a landlord. Renters and people who visit commercial spaces that you are renting out could potentially get injured on property that you own. Under these circumstances, legal actions may be initiated.
To make sure that your own personal assets are protected, you could use an asset protection structure of some type. One possibility is the family limited partnership.
Family Limited Partnership
As the name would suggest, the people in the partnership are all family members. If you establish the family limited partnership, you would be the general partner, and you would add family members to act as limited partners. The general partner is the only partner that has decision-making authority, so you would not be abdicating any power to the limited partners.
You could make the family limited partnership the owner of an apartment building that you have in your possession. If someone was to become injured in the apartment building, your personal property would be protected, because you would no longer own the apartment building. It would be the property of the family limited partnership.
If you own multiple different investment properties, you could choose to convey each respective property into a different family limited partnership. This would add layers of asset protection.
On the other side of the coin, if any member of the partnership is personally sued, the property that is held by the partnership would be protected.
Limited Liability Company
A limited liability company is another legal structure that can be used by business owners to protect personal assets, and here’s how it works. To get started, you file the necessary documentation to form a limited liability company. Once it has been established, you will be entitled to certain protections.
For the most part, your personal property would be protected if your business is sued by a creditor or another entity. However, there are some exceptions. First, if you personally and directly injure someone while you are on the job, you could be held liable.
Secondly, in some instances, the owner of a limited liability company will personally guarantee a loan. Under those circumstances, if the borrower defaults, they would be responsible for the debt.
In addition, the asset protection works in the other direction as well. If the owner of a limited liability company is personally sued, the business would be protected unless a charging order has been issued by the court.
We should touch upon the matter of fraudulent conveyances. You cannot legally establish a limited liability company or a family limited partnership after you find out that you are the target of a legal action. This would be an illegal fraudulent conveyance.
Asset Protection Trusts
It is possible to protect assets through the creation of an irrevocable asset protection trust. When you establish and fund this type of trust, you protect the assets from future creditors. Once again, there are a handful of exceptions, but this is the general rule of thumb. These trusts are not recognized in South Carolina where we practice law. However, you could potentially establish an asset protection trust in a different state that does recognize them.
Plus, there is another type of trust that is widely utilized called the revocable living trust. Assets that you convey into this type of trust would not be protected during your life, because you would have the power of revocation. However, after you pass away, the trust would become irrevocable. Through the inclusion of a spendthrift provision, there would be asset protection for the beneficiaries after your passing.
Estate Tax Asset Protection
When you think about the subject of asset protection in a general sense, lawsuits will naturally come to mind. However, it can be applied to different scenarios from an estate planning perspective.
For example, there is a federal estate tax in the United States that can have a significant impact on your legacy with its 40 percent maximum rate. It is applicable on the portion of an estate that exceeds the credit or exclusion.
In 2023, the estate tax exclusion is $12.92 million. This is the highest exclusion that we have ever had, and it is a product of a provision in the Tax Cuts and Jobs Act. When that measure sunsets at the end of 2025, the exclusion will be reduced. It will return to the 2017 level of $5.48 million indexed for inflation.
If your estate will be affected by the federal estate tax, you can implement an asset protection strategy that will typically involve the utilization of certain types of irrevocable trusts.
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We can help if you are ready to work with a Hilton Head, SC estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, we can be reached by phone at 843-815-8580.
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