GENERAL STRATEGY AND GOALS

The general goal of asset protection is to segregate your assets and liabilities into various categories, thereby limiting the exposure that certain assets may have to certain liabilities.   While this concept may initially sound strange to someone unfamiliar with asset protection, the concept can usually be explained and understood through simple examples.

CASE STUDY: “JOE THE PLUMBER”

Below, we have laid out an illustrative example that we hope will provide some explanation of basic asset protection strategies.

First, imagine a typical plumber, “Joe the Plumber.”

Joe operates his business as a sole-proprietor.

1. •Joe personally owns the tools he uses in the business
   

2. •Joe personally owns the van that he uses for his business
   

3. •Joe uses his personal cell phone as the business
   

4. •Joe co-mingles funds from his business and personal account
   

As a sole proprietor, Joe has very little protection.  His entire business and livelihood is exposed to liabilities from both his personal creditors and those of the business.  Meanwhile, Joe’s personal assets (like his home, his car and personal belongings) are exposed to claims from creditors of the business. If, for instance, Joe were to accidentally install faulty plumbing in a building, the resulting damages give could give rise to a claim that not only threatens his business, but also threatens his personal assets. 

Now, imagine if Joe were to create a limited-liability company through which he can operate his business...

By creating a separate entity, under which he can operate his business, Joe has engaged in what is perhaps the simplest form of asset protection.  Now, he can separate his business assets from his personal assets.  More importantly, Joe can generally protect his personal assets from claims against his business and protect his business assets from claims made against him individually.

Of course, this arrangement still leaves Joe somewhat exposed to creditor claims.  For instance, if a creditor were to go after Joe’s business assets, Joe would likely be able to protect his personal residence and other personal assets from that claim, but the creditor’s claim, if large enough, could threaten to shut down Joe’s business.

Now, imagine if Joe were to create an irrevocable trust to own and manage his plumbing business...

Under this arrangement, Joe can pull excess revenues and assets out of the business, so as to reduce the liquidity of the business and make it less of a target for litigation.  Similarly, Joe can place personal assets under the ownership of the trust, ultimately protecting those assets from creditor claims as well.

However, this arrangement also has its limitations.  First, the protections offered by the trust are limited and fraught with exceptions. As a result, assets placed into the trust may not always be protected from creditor claims.  Second, if a creditor were to aggressively attack the business, that creditor may be able to completely bankrupt the business, destroying everything that Joe has worked so hard to build.

Now, imagine if Joe were to add additional asset holding companies...

Under this arrangement, Joe can further segregate the assets of his business, so as to further safeguard against creditor claims.  Now, if a creditor were to attack the operating company, Joe’s Plumbing LLC, Joe can still most likely protect the assets used in the operation of the business (i.e., the plumbing tools, the van, and other equipment).  The operating company doesn’t actually own any of the equipment used in the operation of the business.  Instead, the operating company rents the equipment from a separate asset holding company.

Also, under this arrangement the intellectual property of the business (i.e., trademarks, trade names, and trade secrets) are owned by a third company that licenses that intellectual property to the operating company.   As a result, if a creditor were to effectively bankrupt the operating company, Joe can still protect the brand name, logo and good will associated with his business and potentially use that intellectual property in future endeavors.

The foregoing example is just one way of structuring a specific business.  Each situation is unique.  Before trying to assemble your own asset protection plan, consult with an attorney trained in this field.  One misstep can make the process effectively worthless.

If you would like to schedule a consultation to discuss your asset protection plan, contact us today.