FIVE THINGS YOU NEED TO KNOW FOR ASSET PROTECTION (FIVE THINGS SNEAKY LAWYERS DON’T WANT YOU TO KNOW)
Entrepreneurs, businesses and individuals should constantly plan on the worse case, even when times are good. This is the first step to asset protection whether you have something to protect now or have in the future. Free market economies are such that there will some bubble every 7 to 10 years. These fall in line with 7 year cycles of ups and downs in all aspects of life. The easiest way to get through the down cycles is to plan during the good cycles, at the end of tough times and at the beginning of the good cycles. While some do not believe that we are at the beginning of a good cycle or simply coming to the end of a bad cycle, now is the time to make proper planning.
1. Maintain Documents. Proper planning starts with keeping copies of all signed documents, along with keeping copies of every document that have to do with any financial guarantee whether it is through the company or personal guarantee. It is amazing the type of guarantees that surface during the sale of a business. Many do not realize there are personal guarantees or corporate liabilities that were unknown. Keeping these documents for a 10 year period is the best practice. Some documents should be kept permanently which would include real estate type documents and business sales. The documents should be kept organized and catalogued with a periodic review. Review of all documents should be done annually with your attorney. Understanding all potential liability whether it may come to fruition or not is extremely important in asset protection and financial planning.
2. Use the Law. During the good times many people become less concerned about protection as opposed to revenue generation. This is true whether someone is trying to get a raise at work or increase sales for a business. Strategic use of entities and company set-up should be done consistently and constantly whether times are good or bad. The law provides protection with legal entities in a variety of situations that are designed to protect the individual and encourage free market activity. Use of these entities is not only proper, but it is the best way to keep the wheels of commerce running. Maintaining and properly using entities has also become extremely important during this last economic cycle. Even a properly set up entity that is not correctly maintained can create personal liability of shareholders or key officers. Maintaining these entities whether they are corporations, limited liability companies, limited liability partnerships, limited partnerships or trusts should be reviewed annually. Challenges to the corporate entity status and attacking trusts are frequent during bad times through litigation of piercing the corporate veil or attacking spendthrift provisions in trusts. It is not only more efficient but provides greater protection to plan in advance and handle these entities correctly before trouble occurs.
3. Incorporate an Estate Plan. While doing this, individuals should also weave into their estate plan all of their documents. This would include setting up proper trusts, along with how the corporate entities would be maintained in the estate plan which should include an estate tax plan, along with the full array of necessary estate documents. Once these plans are set up they are not permanent and they need to be reviewed yearly because the legal nature of changes that occur not only the tax codes, but potential problems that can occur causing part of the entire plan to fail during bad times.
4. Know Who to Trust. As a part of your asset protection plan know who your trusted relationships. These are the people in your life that are almost loyal to a fault. They are the ones that would come to your rescue at any time of the night, at any place and for any reason for no benefit. Of course, they should have a financial acumen and understand the necessity of planning and what their role is, along with confidentiality. There should be protections with the Boy Scout attitude of at least two deep. This means that setting up trustees are not just a single individual regardless how much you trust them, but provide them with the protection by having co-trustees, co-executors, co-officers of your company and the like. Your relationship should include trusted professionals where you have your trusted CPA, your trusted attorney and a trusted investment advisor. These should be people that are in your life regardless of your circumstances and are there with you for good times and bad times. Think of the people that you are going to call at 3:00 in the morning in the middle of nowhere without money and no way of getting out. It is not a matter of who can help you, but it is a matter of who is willing to drop what they are doing to come help you. These are where you are where you start building your trusted relationships which should be included in your asset protection plan.
5. Financials. Along with keeping track of all of your documents, keeping track of your financials is extremely important. It is amazing what we have seen the last few years where assets disappeared off financial statements then suddenly creditors come in questioning where these assets went or even did they exist in the first place. This can cause not only legal problems with fraudulent conveyances and transfers, but potential criminal problems because the question arises were the assets in existence. These types of problems can toll any statute of limitations meaning that the liability clock does not run out. Any financial statement that you provide, including income tax returns and financial records provided to third parties, should be maintained and organized and kept for a minimum of 7 years. We prefer the 10 year rule and it does not matter if they are kept in hard copy form or scanned, but they should be easily accessed and tracked. Review of these financials should be a part of your yearly audit.
Proper tools need to be put in place so that the ship will stay afloat regardless of what storms arise. Build your ship for smooth sailing, but keep it unsinkable during the worst of storms. In other words, do not build the Titantic, build a Zumalt-class destroyer. The Titantic was a big fancy ship of its day that was thought to be unsinkable just because someone said, but turned out to be nothing but a floating disaster. A Zumalt-class destroyer should be used metaphorically as it is designed to come in, appearing to be the size of a small fishing boat on radar, but survive the worst of storms and bring in more lethal fire power than has ever floated on the high seas. Planning should not only be handled correctly, but it should be done well and be done to last.
The bottom line with asset protection is to spend the time now to make plans regardless of your situation and it will save you ten-fold of time in the future, along with unnecessary worry and expense. Every bad business cycle that we have seen in our practice of law there have been numerous situations where we knew if we were involved years before, the problems would have never occurred or would have different outcome. This is not always the case in litigation as it is quite often unavoidable, but proper planning can sure save not only your estate, your well being, but your personal sanity.
Stephen Fuller is the managing partner of Fuller Sloan LLC and has practiced in business litigation and consulting for 37 years and has over 25 years representation of the founder of one of the largest sit-down casual restaurants in America. For more information, send Mr. Fuller an email.