I always suggest a course of continuing education where asset protection principles are concerned. Because your education is never really complete and should be ongoing nevertheless ,here are some BEST ASSET PROTECTION principles to carry around in your wallet:
- Inventory Everything. Make a complete list of your assets and debts. It’s a good idea to do this every three-six months. Remember to think broadly. For example, do you own a vacation home or have retirement assets? Do you hold stock in another company? These may be susceptible to attack in litigation.
- Research exemptions and protective entities. A few of your assets may be exempt from creditor actions because of federal or state laws. These typically include your personal residence, your pension or retirement fund, and your life insurance policy. These should be the few assets that are in your name. As for all other assets, consider setting protection in the form of LLC’s, S-Corporations, domestic trusts and perhaps offshore trusts (make sure your consult with a specialist to ensure foreign government credibility concerning offshore placements). “You can also layer the protection by using multiple entities. You can go even further and equity-strip the assets by taking loans against the assets or refinancing them. This allows the asset to be less attractive to creditors.
- Avoid personal guarantees. A personal guarantee is when you pledge to be personally responsible for a debt. The result is that you essentially lose the protection of your company’s corporate status. Put a time limit on any bank-required loan guarantee and/or specify a particular asset as collateral. Nevertheless, clients may try to get a personal guarantee. Don’t allow it. Get another client please!
- Examine ALL contracts you sign. While your company’s corporate structure may provide some protection, it may not be enough if there’s a tort action or claim for fraud. In such cases, you may have personal liability. This is why I have always said that it’s important to provide liability protection in your contracts. This includes capping damages and even disallowing certain types of damages. ONLY sign contracts on behalf of your company—not in your name. Avoid the chance the contract could later be considered a personal guarantee.
- Buy insurance. While asset protection can be extremely helpful in avoiding personal liability, a creditor may still be determined to go after your assets. That’s why it is important to have insurance protection. Liability insurance covers business assets and damages for personal injuries and property damages that you or other people cause (such as your employees) while in the scope of running your business. Property insurance covers your company’s assets. Seriously consider an umbrella policy to cover exposure that goes beyond property insurance. It is inexpensive and readily available.