Top 2 Ways Business People Can Protect their Families from Company Mistakes
Entity Formation layered with a Trust
First Line of Defense – Entity Formation
The first and most obvious way to protect your family and assets from the liabilities associated with operating a business is to form an entity other than a sole proprietorship. It is that simple. Just do it. I am happy to help you determine what is best for your entity.
Second Line of Defense – Estate Planning with a Trust
The second best way to protect your family and assets from your company is to engage in some estate planning. Jim Norman, a great estate planning attorney in Austin, and I have some recommendations based on some work that we have done.
Living trusts have a bad connotation for some folks because of the people peddling them, but the reality is that they are still a good protection mechanism for some folks who have multi-jurisdictional assets. Without trust, all your purchases will pass through some form of probate in the jurisdiction where they reside with an attorney from that jurisdiction. This makes multi-jurisdictional estate resolution an expensive and burdensome process. A trust, however, generally operates in one jurisdiction and is not mortal. As a result, a belief only “dies” when it is supposed to and only distributes assets when it is supposed to
The biggest issue a living trust may solve for you is asset protection, but you must treat the faith like a trust, just as you must treat your business entity like a business entity. More specifically, a revocable trust controlled entirely by the business owner may be deemed in court to be a mere façade and not a separate asset-owning unit. Giving up control of your life’s assets to an independent trustee can be a scary proposition to the entrepreneurial type. Still, it is becoming the norm within certain professions, such as physicians. All of this becomes increasingly important as you approach retirement or collect substantial assets because let’s face it, it isn’t worth anyone’s time to sue you when you are a pauper.
A few other nuanced issues that should be considered when contemplating establishing a trust to protect your assets from your business liability:
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Be careful about how beneficiaries eventually receive your trust assets. For example, if your beneficiary works in a hazardous industry, it may be prudent to ensure assets stay protected in a trust.
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There are creative ways to use a trust or similar instrument to minimize the estate tax consequences of passing on your family business or other assets. For example, suppose you put the one-half ownership interest of your house into a family-limited partnership. In that case, the value of that interest for tax purposes plummets because the fair market value of half a home is much diminished.
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Even if your work is not particularly dangerous and you aren’t particularly profitable, you may consider establishing a trust to protect your assets if your business has been around for a while. The longer a company has been around, the more opportunity there is for old grievances to arise in the form of lawsuits.
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Considerations should be made for your trust regarding your risk of disability. For example, suppose an entrepreneur becomes disabled. In that case, he will likely lose his revenue stream, so he needs to be sure his trust assets will become readily available to him to overcome the shortfall.
Trust can be the ideal tool to protect the assets of an entrepreneur, but it is a many-faceted proposition. Therefore, I highly recommend requiring your business’s attorney and your estate attorney to work collaboratively and ensure you are adequately protected.
Feel free to contact Austin attorney Jim Norman to discuss personal asset protection.
