Trying to plan your North Carolina estate? Get the answers you need to protect your family.
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Is asset protection planning aimed at eliminating legitimate debts?
No, absolutely not. If you owe someone a legitimate debt, asset protection planning is not going to remove your obligation to pay the debt. In particular, if you intentionally incurred a debt or obligation and then placed your asset in a trust or some other asset protection vehicle, this will be deemed a fraudulent transfer and the law will not protect you.
If I have an umbrella insurance policy or my employer or business provides Errors & Omission (E&O) insurance or Directors & Officers (D&O) Liability Insurance, do I need to be concerned about liability and asset protection planning?
Yes. Umbrella insurance is a great place to start, but unfortunately it doesn’t cover everything. A colleague once shared a story about a consultant that specialized in liability insurance. He would be called into major corporations to review their liability insurance and he regular reviews umbrella policies. On a regular basis, he would find pages of issues or matters not covered by the insurance policies. Thus, we still recommend asset protection planning, but consider the insurance your first line of defense.
I have malpractice insurance, do I need to be concerned with liability and asset protection planning?
Yes. For professionals that carry the possibility of malpractice claims, such as doctors, dentists, lawyers, accountants. For such professions, malpractice is a personal liability—meaning that operating through a business entity such as a corporation nor limited liability company will not protect you from the claim. This means that if you are sued for malpractice and either you don’t have malpractice insurance or it doesn’t include enough coverage to fully cover the claim, your personal assets will be at risk to the malpractice claim.
If I Have a Limited Liability Company (LLC), Do I Need Additional Asset Protection Planning?
Probably. Limited Liability Companies (LLCs) are a common asset protection tool for those that operate a business, own an investment property, or own rental property. However, additional asset protection is probably needed. Asset Protection Planning generally includes mitigating risks from all sources, including both business and personal lawsuits, taxes, health care and long-term care costs, and similar.
For owners of LLCs, it's important to understand the limits of the liability protection provided by the LLC. There are essentially two types of liability that need to be considered: “inside liability” and “outside liability.”
Limited Liability Companies (LLCs) Provide "Inside" Liability
Inside liability refers to liability as a result of business operations—such as disgruntled customers, vendors or employees. Perhaps you own a construction company and someone becomes injured on the job, or you own an plumbing business and one of your employees caused an accident in the company van.
If the business entity is properly structured and maintained (note that this is an important step that many small business owners neglect), then the business entity will shield the business owners personal assets and home from lawsuits resulting from inside liability, with the exception of certain special forms of liability such as malpractice liability. This means that if the business is sued, typically only the business assets will be at risk to the lawsuit.
Outside liability is liability resulting from your personal life. Perhaps you cause a severe car accident, someone is injured on your property, or some other catastrophe. The person bringing the lawsuit can’t directly take business assets, BUT in some states they can try to claim your ownership in the business—i.e., your stock or ownership interest in the corporation or limited liability company. Fortunately, in North Carolina, the law does not permit a creditor to take your ownership in the business. A creditor can, however, seek a charging order. A charging order gives the creditor the right to go after any distributions made from the LLC to you as an owner of the LLC.
"Piercing the Corporate Veil"
It's also important to understand that for an LLC to provide asset protection, you must legitimately operate it as a separate entity--separate bank accounts, separate record-keeping, separate insurance, etc. This is the area where far too many LLC owners get sloppy and jeopardize the asset protection.
Double Layered Protection
As an added measure, many business owners or professionals that are at risk of malpractice exposure, such as doctors, dentists, lawyers, and accountants, may want to undertake asset protection planning for their personal assets to create further separation between their personal assets and business assets. We may consider placing your LLC or business inside a separate asset protection trust for an additional layer of protection.Similarly, it can be prudent to separate higher risk assets, such as automobiles and rental real estate, from other assets and property.
In our office, we call this “bubbles and boxes.” The bubbles representing business entities and the boxes representing trusts. Depending on the asset mix and risks, we may recommend some combination of one or more bubbles and boxes to achieve maximum separation of assets.
Are You a Sitting Target?
Unfortunately, due to the nature of their professional or financial stature, some individuals have a higher likelihood of being sued—in other words, those that have something to lose.
In our years of experience having worked with thousands of clients in the Wake County area, we find that asset protection planning is particularly important for if any of the following apply to you:
- Own a home and have an estimated net worth of $1M or more;
- Own vacation property;
- Own rental property;
- Are high income-earning professionals;
- Are high income-earning business owners;
- Own a business with significant value.
Don’t leave yourself or your loved ones stuck dealing with the financial aftermath that a lawsuit, medical bills or long-term care costs, or unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 443-3035 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish request a free copy Jackie Bedard’s book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.
Asset Protection Planning Series:
Why is planning advance so important and what are fraudulent conveyances?
Think of asset protection planning like buying car insurance. If you haven’t bought insurance yet and you wreck your car, you’re out of luck. You can’t buy insurance after the fact. Similarly, if you attempt asset protection planning after a known event, it’s highly likely that a court of law is going to consider this a fraudulent conveyance that was undertaken in contemplation of a lawsuit.
Why might adding my children to my assets or accounts increase my risk to lawsuits and creditors?
Many people believe that an ‘easy’ way to avoid probate or to enable their children to assist them as they get older is to add their child to their bank accounts or even to the deed to their home. In our office, this is what we call the ‘coffee shop’ and ‘beauty parlor’ law. You heard from a friend, who’s neighbor’s non-lawyer brother-in-law said it was a good idea. And while occasionally it might work for some, there are many reasons why this approach is NOT recommended:
- The bank account or real estate is now considered owned jointly by that person and as a result, may be at risk if your child is sued, divorces, or files for bankruptcy. Recently, a colleague of mine shared a story with me about a client that added her daughter to the deed to her home. Her daughter later ran into some health issues, ultimately lost her job and wound up filing for bankruptcy. During the daughter’s bankruptcy proceeding, her mother lost her house because it was deeded in the daughter’s name and therefore was subject to the bankruptcy proceeding. Similarly, let’s say that your child causes a fatal car accident and is being sued. Guess what? If titled jointly, your bank account or real estate might be at risk to the lawsuit!
- Once a child is added to your bank account, he or she can withdraw some or all of the account or can try to sell or mortgage his or her share of the house. Money has a funny influence on people and unfortunately, there are many stories and examples where children have wiped out their parents savings.
- Your child falls on hard times—perhaps a job loss, health crisis, addiction, or some other jeopardy. And while they may never have intended do, sometimes life events happen that might just make this too tempting and the next thing you know, they’ve convinced themselves that you “would have wanted to help them out and won’t mind if they dip in the account a little bit”…and a little more… and a little bit more, until there’s nothing left.
The bottom line is that there are much more effective estate planning tools that can help us avoid or limit your exposure to these situations.
Read even more reasons why it's not a good idea to add children or family members as joint owners on your assets or accounts.
Aren’t certain assets automatically protected from lawsuits and creditors?
Yes. By federal and state laws, certain types of assets and accounts may be entirely or partially protected from lawsuits or creditors. The amount and type of assets that are protected varies from state to state.
Assets That May Be Protected
NOTE: The following assets may be protected from lawsuits and creditors, but they are not protected for nursing home and Medicaid planning purposes.
- Real estate owned jointly by husband and wife—referred to as “tenants by the entirety” is afforded protections in certain contexts.
- Death benefits from life insurance policies if the beneficiary is a spouse, or a trust for the spouse’s or child’s benefit.
- Annuities, if the beneficiary is a spouse, child, or a trust for a spouse’s or child’s benefit.
- Retirement plans such as IRAs, 401(k)s, pension plans, profit sharing plans and similar plans.
- Asset protection trusts for your benefit established by someone else, such as your parents or grandparents.
- Assets held in a limited liability company (LLC), depending upon the context.
- Assets held in a family limited partnership (FLP), depending upon the context.
- Assets held in certain types of asset protection trusts established by you for your own benefit.
Assets That Are Not Protected
- Real estate held solely in your name.
- Real estate owned jointly with someone other than your spouse.
- Cash value and death benefits from life insurance policies if the beneficiary is your estate or someone other than your spouse, a child, or a trust for your spouse’s or child’s benefit.
- Stocks, bonds, and brokerage investment accounts.
- Cash, Certificates of Deposit (CDs), checking accounts, savings accounts, money market accounts.
- Monies owed to you (such as notes receivable or mortgages receivable).
- Business interests, such as stock or ownership interest in your corporations, partnerships, limited liability company (LLC) or sole proprietorships.
- Tangible personal property, such as china, antiques, silver, crystal, jewelry, furniture, appliances, collections and other valuables.
- Vehicles, such as cars, trucks, motorcycles, airplanes, boats, all terrain vehicles (ATVs), motor homes, recreational vehicles (RVs) and similar.
Please note that this article is meant to provide a general overview and is not a substitute for legal advice. That said, plan ahead! Don’t leave yourself or your loved ones stuck dealing with the financial aftermath that a lawsuit, medical bills or long-term care costs, or unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 586-8222 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish request a free copy our book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.
How can I protect my beneficiaries and their inheritance from lawsuits, creditors, bankruptcy and divorce?
Did you know that it’s relative easy for you to leave your assets to your children so that they are protected from future lawsuits, creditors, bankruptcy and divorce?
For example, let’s say one day your child causes a bad car accident in which a person is left permanently disabled. A few months later, a lawsuit is filed against your child for hundreds of thousands of dollars—your child’s entire inheritance.
Or, maybe your child receives his inheritance at age 25 and he or she is married. A year or so later, the marriage is in shambles and his wife files for divorce and walks out the door with half of everything—including your son’s inheritance.
Wouldn’t you feel better knowing that when that lawsuit or divorce came along, your child’s inheritance would be protected from it? This is something we can accomplish with appropriate trust planning provisions.