There’s an old Carole King
song that plays in my mind’s jukebox when certain clients come
to see me about protecting their assets. It goes like this:
“It’s too late, baby now, it’s too late…” As much as I’d like
to help them, those clients leave my office singing the blues.
Asset protection is a lot like
buying insurance. You don’t wait until your house burns down
to purchase fire insurance. You wouldn’t get collision
coverage on a car you just totaled. Nor, can you buy life
insurance on someone who is already dead. After the damage is
done, insurance will do you no good. When it comes to securing
your personal and business assets, after-the-fact legal
maneuvering is usually futile as well. All too often, people
overlook the importance of asset protection until a lawsuit is
imminent or a creditor comes pounding on the door. Both state
and federal laws prohibit transferring property—whether real
or personal---to avoid a known creditor. The legal term is
“fraudulent conveyance,” and a conviction carries serious
consequences.
Small business owners, perhaps
more than anyone else, need solid asset protection. Twenty or
thirty years spent building a business can be wiped out by one
“slip and fall” on the premises. Jane, for example, owned
several properties, including a restaurant valued at $250,000,
which she owned as a sole proprietorship. An elderly customer
slipped on a piece of lettuce, fell, and broke a hip. He died
from an ensuing infection. His family sued Jane and won a $1.5
million judgment. If Jane had formed a limited liability
company (LLC) to own her restaurant, the maximum judgment
possible would have been $250,000 (the value of her
restaurant), and her other assets would have been protected.
Instead, Jane was forced to sell virtually all of her assets
to satisfy the judgment—including the restaurant that was her
primary income producer.
Mr. Smith (not his real name)
caused a car accident that killed two people. Frightened over
the possibility of a major lawsuit against him, he came to me
for advice about protecting his assets. If he had called a
week earlier—before the accident---I could have created any
one of several effective, inexpensive shields to protect his
assets. But since Mr. Smith waited until after the liability,
my hands were tied.
Another client, Mr. Jones, had
accumulated nearly $500,000 in debt against about $200,000
equity in real estate. Creditors were threatening foreclosures
and other lawsuits to collect on past due principle and
interest. Jones came to me in a panic—hoping to deed some of
the land to relatives to remove it from his estate. By using
irrevocable trusts or limited liability companies, he could
have protected most of his assets. But because he failed to
plan ahead, I could offer him no better option than to file
bankruptcy. Under Arizona’s homestead exemption, he would
retain $100,000 in home equity, but his other assets were
seized. An important lesson from this case: when a property is
mortgaged, you have a known creditor. To activate an
asset protection method to avoid that creditor is subject to
prosecution for fraudulent conveyance.
Don’t ever be lulled into
thinking that because you have business insurance or even a
personal umbrella policy, your assets are protected. Yes,
insurance is important; but to rely strictly on insurance to
protect your business and estate would likely be both
cost-prohibitive and ineffective. Judges and juries are
awarding outrageously high judgments in personal injury cases
today. Properly executed limited liability companies and
trusts are relatively inexpensive, bulletproof shields against
even the largest lawsuits. Save yourself a lot of agony and
heartache by protecting your assets now—before the gavel
drops.
Bill Gibney is
an estate-planning attorney, practicing in Phoenix. His
specialty is asset protection. He can be reached at
602-953-0006 or at gibneylaw@cox.net..
