June 7, 2023
A series of blogs on Asset Protection….
When should asset protection start?
The easy answer is the moment one either acquires assets or when those assets become at risk. Another way to answer the question for a lawyer and client is the first time that the attorney meets with the client. Generally, the client comes to an attorney with a problem or an issue. This could be the startup of a business enterprise, a piece of litigation, or a question about any area of the law. Assuming the question impacts the client in any way, the attorney should inquire about assets the client holds. We generally use a handy pre-bankruptcy questionnaire that has a thorough list of asset categories.
If the client is seeing the lawyer about the formation of a business entity, which is a form of asset protection itself, then questions should be asked regarding the client’s personal holdings. No start up entrepreneur ever wants to consider that their business may fail, but most startups do fail within 5 years, leaving the entrepreneurs fending off creditors. Many business owners do not realize that vendors will ask the principal owner of the business to sign a personal guaranty before extending credit. Putting assets in corporations, trusts, spouse’s name, etc. can protect the asset from later attachment by creditors of the failed business.
One of our later posts will discuss avoidable (fraudulent) transfers. However, if there is no debt at the time of a transfer, that may be enough to prevent creditors suing for avoidance of the transfer. Also, by doing the transfer early, it starts the clock running on the statute of limitations.
A client recently told us that he put his wife on the corporate checking account, even though she had no role in the company, so there would be someone available to sign a check. Five years later, IRS has a tax claim and wants to know who had authority to sign checks. The wife could end up with unintended liability if she signed checks and payroll taxes went unpaid. Fortunately for the client, although his wife had the authority, she never actually signed any of the checks.
Asset protection is like voting in Chicago, it should be done early and often.
We have more to say about Asset Protection Planning in our next post or podcast. Stay tuned…