Asset protection planning involves making prudent decisions today to protect yourself, your business, and your hard-earned assets from loss due to lawsuits, creditors and bankruptcy. This type of legal planning is especially prudent for professionals and business owners, whose personal assets could be at risk due the nature of their employment.
Statistically and anecdotally, we all know that the number of divorces, lawsuits and bankruptcies is staggering. While no one believes lightning will strike them, wealth created through a lifetime of work, saving and investing can be lost overnight if these forms of man-made lightning do strike. To protect your assets from such disaster, proper risk management strategies should be given careful consideration. These strategies include exempting your assets from the claims of creditors, limiting your liability through legal entities, and transferring your risk through insurance.
This is a very complicated area of the law with many pitfalls since, if protecting assets was easy, no one ever would have to pay any judgments rendered against them. This discussion barely touches the surface of the issues, and should not be thought of as anywhere near sufficient for you to understand what can and cannot be done.
Many entrepreneurs operate their businesses as sole proprietors rather than through a legal entity, such as a Corporation or a Limited Liability Company. Whether their business is home-based or in the Fortune 500, these business owners are attracted by the informality of sole proprietorship. They also do not want to incur legal fees to create and maintain a legal entity. However, in addition to other advantages, conducting business through a legal entity may offer substantial risk management benefits.
While lawsuits brought against a sole proprietorship are really lawsuits against the owner’s personal assets, lawsuits against a properly created and maintained legal entity are really lawsuits against the entity’s assets. Nevertheless, the selection of an appropriate legal entity is critical for managing your risk.
When was the last time you reviewed the details of your liability insurance program with your insurance professionals? Are your policies current? Are the coverage limits adequate and are the deductibles reasonable? Have you scrutinized the policies for loopholes? Remember: the fundamental philosophy of any insurance coverage is to pay a premium you can afford to transfer a risk you cannot afford. Take time to understand both the risks you have retained and the risks you have transferred. Remember that the legal profession includes “coverage attorneys” who litigate over whether insurance policies cover particular risks. It is important to know the policy exclusions before you are hit with a lawsuit.
State and federal laws exempt some of your assets from the claims of creditors. Click here to download a listing of California’s exempt assets; note that while some states allow you to choose either the state or federal exemptions, in California you must use the state exemptions, and federal bankruptcy exemptions are not available.
Once you have identified the protected asset classes available to you under applicable law, it may be prudent to maximize your protection by converting non-exempt assets into exempt assets.
In general, California law is much more creditor friendly than debtor friendly. Thus, if you run into trouble, do not expect much protection from the default provisions of California law.