“What Could Go Wrong? I Don’t Have Creditors.”
Many business owners and successful heads of household tell me that they don’t need to protect assets because they aren’t millionnaires. They say, “I pay my bills,” “I don’t have creditors,” and “I treat my employees and customers right.” I feel blessed to work with such good people. If you have experienced as much “life” as I have in the short amount of time that I have walked the earth, you know, as well as I that sometimes bad things happen to good people. You have probably also seen a friend or family member suffer an economic downturn or medical catastrophe through no fault of their own. I’ll share two additional reasons that you should have started protecting your assets already in this short article.
Sometimes Bad Things Happen to Good People
New Mexico establishments are 66% more likely than establishments in other states of facing equal employment opportunity commission charges from employees. https://www.hiscox.com/shared-documents/The-2015-Hiscox-Guide-to-Employee-Lawsuits-Employee-charge-trends-across-the-United-States.pdf New Mexico may be higher than Texas, but Texas businesses suffer too. “Small businesses bore 81% of business tort liability costs but took in only 22% of revenue.” “Tort Liability Costs for Small Business,” U.S. Chamber Institute for Legal Reform, July 2010, available at http://www.instituteforlegalreform.com/uploads/sites/1/ilr_small_business_2010_0.pdf
It is Less Expensive to Protect Assets than to Defend Lawsuits
Hiring a good attorney with experience protecting assets is worth the legal fees. Establishing trusts or business entities will cost money but will save you stress, anxiety, and is usually a deterrent to frivolous lawsuit filers. According to a representative of the National Federation of Independent Businesses (NFIB), “Frivolous lawsuits are often filed just to harass small business owners but they still cost owners’ legal fees and time which could range from $2,000 to $5,000…Our typical member averages $50,000 a year…If you take $5,000 out that’s a significant hit.” Stephen Parezo, “Frivolous Lawsuits: A serious Threat to Nation’s Small Business,” Smartpros, April 2005, available at http://accounting.smartpros.com/x47861.xml. If you multiply the number of frivolous lawsuits that could be filed over the life of the business, it easy to see how one planning session with a good attorney and follow up checkups through a lawyer on retainer will be well worth it. The average total cost of claims that resulted in a defense and settlement payment nationwide in 2015 was $125,000. https://www.hiscox.com/shared-documents/The-2015-Hiscox-Guide-to-Employee-Lawsuits-Employee-charge-trends-across-the-United-States.pdf
Protecting Your Assets Too Late Might Result in a Court Finding a Fraudulent Transfer
Although courts have ruled that the simplest type of asset protection, i.e. setting up a company, is legal, there are instances when setting up a company purely for asset protection is ipso facto a fraudulent transfer.
Fraudulent transfers (also called fraudulent conveyances) come up in asset protection planning because creditors often claim that the property was transferred after the claim arose. The definition of a fraudulent transfer is fairly broad. A fraudulent transfer is usually a transfer that is made before or after the claim arose with the intent to defraud, hinder, or delay a known or likely creditor. Intent is generally presumed, leaving the defendant with the burden of proof that there was no fraudulent intent, and it is extremely difficult to prove a negative such as this. Courts look at “badges of fraud” including the transfer of non-exempt assets, a transfer for less than full and fair consideration, and insolvency following the transfer. Where the court determines that there was a fraudulent transfer within the applicable statute of limitations the court can set aside the transfer. That is, the court can order the transactions to be reversed so that the creditors can make claims on the assets.
The key to avoiding fraudulent transfer problems is the timing of transfers to an asset protection entity. An asset protection system must be in place before a claim arises in order to get the best possible result. This is not to say that estate and asset protection planning cannot be done under threat of a claim, just that additional design and planning issues will arise.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney
Call Marquardt Law Firm, P.C. to find out whether we are the right law firm for you. We work with clients who are motivated to tax-efficiently protect and preserve assets, reduce family conflict, and maximize government benefits. Our mission is to be the preeminent regional asset protection and wealth preservation law firm.