Asset Protection
It’s not just for millionaires any more.
Excalibur
Presented by
Management, Inc.
Asset Protection
Asset Protection scares me!
Admit it. When someone mentions Asset Protection, you think of covert wire transfers through
private banks in the Caribbean. You think of numbered Swiss bank accounts. Reminiscent of the
Godfather movies, you can buy “protection” – or else. Finally, tax dodgers and creditor dodgers
(no relation to the Los Angeles Dodgers) hide their income or hide their assets from legitimate
claims.
In fact, none of the above examples are fictitious. If you have an extra $10,000, you can put it
in a bank in Geneva that only has a number to identify it.
We don’t offer that kind of Asset Protection. Instead, we advise you to pay tax on all of your
income, make payment arrangements with creditors when money is tight, but always have
insurance.
Your home and your car are insured, right? That’s one kind of asset protection. We have other
ways to help you prevent losing your home or your business to greedy individuals who like to
play Robin Hood AND his benefactor.
You’ve heard about the woman who sued McDonalds because she burned herself with hot coffee.
What if it had been a local café that was sued instead of corporate giant McDonalds? That café
would be gone, and so would the owner’s home. The initial award for punitive damages was
$2.7 million – the most expensive cup of coffee ever sold. That kind of judgment pretty much
takes all of the assets of most of us.
What about your business? It’s easy to make a mistake, and someone may get hurt – financially,
of not physically. The reason we need asset protection is not to avoid legitimate debts. We want
to protect you from aggressive attorneys and their greedy clients who pull in front of you and
slam on their brakes, or who not-so-accidentally slip and fall in your place of business, and file a
suit against you. Whether they win or not, it will cost you – attorney’s fees, time away from your
business, your reputation…
Every person’s situation is different. We customize your Asset Protection structure to fit your
situation – at the lowest cost possible. Generally, we help you separate your business assets
from your personal assets, or your “at risk” assets from those not generally at risk. Usually we
create a corporation or a Limited Liability Company into which you transfer your business assets.
The corporation or LLC may lose assets, but your personal assets are protected – if you do it
right!
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Asset Protection
Call us to find out more, but here are a few pointers:
Plan Ahead
If someone has filed a suit against you, or if you’re in a financial bind and creditors are circling,
it’s too late to begin an Asset Protection plan.
• Transfers of assets within four years of creditor action can come under scrutiny by the
Uniform Fraudulent Transfer Act, adopted in all of the states.
• Transfers of assets within one year of filing a petition on bankruptcy will come under scrutiny
by the Court.
Even if timing is adequate, the Courts will consider a transfer constructive fraud if:
• The debtor was insolvent when the transfer was made, or
• The debtor did not receive adequate consideration. In other words, the debtor did not
receive an equal value for the assets he or she “sold.”
Plan NOW to protect yourself – you can’t purchase fire insurance while your home is on
fire.
Create a Structure
Basic asset protection is simply not putting all of your eggs in one basket. If you are a plumber
doing business as a sole proprietor and you are sued by a customer who claims compensation for
a flooded basement after you installed his water heater, he can take your personal assets if the
court finds in his favor. If you are doing business under a legal business entity, only the assets
of the business are at risk – if you have set it up properly.
If you own the building where you have your plumbing business, and you own an apartment
building, the commercial building and the apartments should be held separately from the
plumbing business and from each other.
Which entity is the best for me?
Each entity type has advantages and disadvantages. Each individual will have different needs
and situations. You should research all of the options, then seek professional advice to help you
determine the structure best suited to your business and asset protection needs – in addition to
your comfort level.
While the most complex structures offer the most protection from someone seeking to cause an
involuntary distribution of your assets, the costs involved with the creation and maintenance of a
complex structure must be considered. Here are some of the costs:
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Asset Protection
Creating an entity
• Cost of preparing the documents that create the entity and that comply with the laws of the
state in which the entity is formed.
• Filing fees in the state of formation.
• Filing fees in the state(s) where business is conducted.
• Books and records of the entity, including stock certificates, corporate seals, and other office
supplies like filing cabinets and file folders.
• Setting up an accounting system.
• Compliance with Federal, State and local requirements – Employer Identification Number,
State withholding and sales tax registration, unemployment registration, business licenses.
Ongoing costs of operating an entity
• Annual fees to the state of formation.
• Annual fees to the state(s) where business is conducted.
• Payroll tax and sales tax reporting.
• Federal and State income tax returns.
• Costs of keeping accounting records.
You will need to weigh the costs and other requirements of creating an asset protection structure
with the amount of protection you receive. Consider the cost of such a structure a form of
insurance. Everyone needs some degree of insurance. However, a contractor who builds high
rise office buildings will need more protection than a flower shop.
Best advice – consider all of the factors when choosing an entity structure. Don’t
base your decision on tax advantages alone or on asset protection advantages
alone.
What is the best type of entity for asset protection?
Generally, a Limited Liability Company is best suited to asset protection structures for three
reasons:
1. Protection for personal assets – business creditors cannot get to the assets of the LLC
members. Corporations are structured the same way, but if you don’t comply with all of
the formalities and record keeping, the court may rule that the corporation is not valid,
and can allow creditors of the corporation to pursue your personal assets.
2. Protection for business assets – in some states, even if a personal creditor is granted an
ownership interest in the LLC by the Court, the creditor will not have the ability to
liquidate the business, as he would if he owned stock in a corporation.
3. No limitation on the type of entity that can be an owner – a corporation, a trust or
another LLC can have ownership interest in an LLC. An S Corporation can only have live
humans as shareholders.
The following chart summarizes a comparison of S Corporations and Limited Liability Companies:
S Corporation Limited Liability Company
Liability Protection Yes Yes
Operational Control Board of Directors/Officers May be member-managed or
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Asset Protection
S Corporation Limited Liability Company
manager-managed
Federal Income Tax Pass-through Pass-through
No; subject to the same
formalities and record keeping
Flexibility/Ease of Operation Yes
rules as traditional “C”
corporations.
If you fail to comply with the
formalities – directors and
Because the record keeping
shareholder meetings, record
requirements are relaxed, it is
Why is the lack of formal keeping, etc., the Court may
less likely the Court would find
requirements important? determine that it’s not a valid
reason to rule that the LLC
corporation and disallow the
was invalid.
liability protection. (Called
“piercing the corporate veil.”)
Yes (LLC’s, trusts, or other
Ownership Restrictions corporations may not be No
shareholders)
Flexibility in Profit-Sharing –
profits and losses can be
No Yes
allocated in a percentage
different from ownership
Employment/payroll tax on
Self-employment tax on total
Employment Tax salary; no employment tax on
net income
dividends paid to shareholders
(1) If you don’t pay yourself a
“fair” salary in an attempt to
avoid self employment tax, the
IRS may decide what is fair It may be more cost effective
compensation, and impose to pay self employment tax on
penalties and interest on the all of your distributed income,
difference. than to comply with the
(2) The IRS requires that a withholding, deposit and
S-Corporations may not have
corporation withhold Federal reporting requirements,
such an advantage regarding
income tax, Social Security particularly if the net income
self employment tax
and Medicare on each from the business is not
paycheck, make timely Federal significantly larger than the
Tax Deposits, and file amount the IRS would
quarterly payroll tax returns. consider fair compensation for
(3) In addition, corporate your services.
wages are subject to Federal
and State unemployment
contributions.
The creditor will own the stock
Charging orders – the Court in the corporation, and as
The creditor will have a non-
awards your personal creditor such will have voting interest.
voting interest. He cannot
your interest in the business If you had a majority interest,
participate in the management
entity to satisfy a personal the creditor may cause a
of the company.
debt liquidation of the corporation
to satisfy his claim.
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Asset Protection
Now you have the structure, don’t waste it
The following items are very important in keeping your assets protected:
Assets must be legally transferred. Document the sale of assets from one entity (especially
yourself) to another. Any real estate transferred should have a deed, and that deed should be
recorded in the county where the property is. Proper consideration (what you get in return) is
vital.
The business must be operated as a business. Keep separate books and records. Have the
required meetings. Make sound business decisions. Pay yourself a fair salary.
Keep a low profile. Nice cars, homes, jewelry and recreational toys are fun to have, but you
are showing people that you have money. An individual who targets people for law suits will
chose the BMW driver over the guy driving around in a Yugo.
Okay, I’m convinced, how much is it going to cost me?
Obviously, the cost depends on the individual needs and situation. Some may only need an LLC,
which will cost in the range of $150 – 350, with an annual cost of $12 and up, plus the cost of
preparing the tax return. Others may need a more complex structure.
Perhaps the more important question is: What will it cost me if I do nothing, and I get
hit with a legal action or another financially catastrophic event?
Think about it, but don’t wait too long!
We would be happy to answer any questions you have.
(801) 964-2090
www.excaliburmanagement.com
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