ARE YOU AT RISK FOR LIABILITY?
For most people the answer is yes. Youdon’t have to be a “bad person” or grosslynegligent to be sued. You also don’t have tobe extremely wealthy to be sued (althoughit may make you a more attractive target).There are a number of everyday occurrencesthat can expose your personal assets toliability. For example, if you loan your vehicleto your granddaughter and she is involvedin an accident, you may be potentially liablefor damages that occur as a result of theaccident.
These individual risks may also becompounded by business risks. For example,individuals involved in the active operationand ownership of a business can exposetheir personal assets to the liabilities ofthe business where proper limited liabilitystructures are not in place.
So what can be done to minimize theserisks? There are a number of asset protectionstrategies that can be implemented to helpencapsulate liability. This article will discuss afew of the basic steps individuals can take toprotect their property from liability.
OBTAIN A GENERAL LIABILITYUMBRELLA POLICY.
Anyone who’s concerned about liabilityshould consult with an insurance professionalabout the benefits of a general liabilityumbrella policy. This is one of the simplestways to obtain significant asset protection.
TRANSFER PROPERTY OR ASSETSTO A BUSINESS ENTITY OR TRUST.
An individual can take steps to placecertain assets out of a potential creditor’sreach by transferring them to a legal entitysuch as a limited partnership, corporation orlimited liability company. The entity shouldbe made to accomplish a stated businesspurpose. This is to avoid claims by creditorsthat the transfer was a mere sham transactionwhich might allow the creditor to set asidethe transfer. For this same reason, care shouldbe taken to ensure that all formalities of theentity are respected.
Business assets should be kept in a limitedliability entity so that creditors cannot reacha business owner’s personal assets to satisfythe creditors’ claims against the business. Thishelps to ensure that an individual’s personalassets are legally segregated from that of thebusiness.
An individual can also place his or herassets into an irrevocable trust. A trustis a legal entity created by a grantor forthe benefit of designated beneficiaries.Transfers by gift to an irrevocable trust canachieve some level of asset protection byplacing property beyond the reach of anindividual’s creditors. To achieve full creditorprotection, the grantor must relinquish hisor her beneficial interest in the property.An irrevocable trust is a good option forindividuals hoping to protect assets that willbe used for the benefit of the transferor’sfamily (or chosen donee) from the reach ofthe transferor’s creditors.
MARITAL PROPERTY PLANNING.
In Texas, property owned by a spouseat the time of marriage is that spouse’sseparate property, as is property acquiredby the spouse during the marriage by giftor inheritance. All other property acquiredduring the marriage is community propertywhich can be either: (1) sole managementcommunity property (the community
property that each spouse would have ownedif not married, including but not limited tothat spouse’s personal earnings), or (2) jointmanagement community property (thespouses’ combined and commingled solemanagement community property).
Generally speaking, joint managementcommunity property is liable for eachspouse’s pre and post–marital liabilities. Aspouse’s separate property is not subject tothe liabilities of the other spouse unless; bothspouses are liable under other rules of law.A spouse’s sole management communityproperty is not liable for the other spouse’spremarital liabilities or the other spouse’spost–marital non–tortious liabilities.Because of this, the characterizationof property as separate property, solemanagement community property or jointmanagement community property plays a largerole in a creditor’s ability to reach the property.Some basic asset protection planningwould involve taking steps to avoidcommingling different types of maritalproperty, maintaining the character ofmarital property and/or under appropriatecircumstances, converting the characterof the marital property. For example,though the use of partition and exchangeagreements, spouses can convert communityproperty into separate property. If one spouseis engaged in a business or undertakingwhere risk of liability is significant, theseparate property of the low risk spousecreated as a result of the agreement wouldnot be liable for the debts of the high riskspouse.
This article is not intended to be anexhaustive discussion of the asset protectionstrategies available to an individual. Inaddition, there are restrictions on assettransfers under fraudulent transferacts that should be considered whencontemplating asset protection strategies.Please consult with your legal and financialprofessionals to determine which assetprotection strategies are best suited foryour particular needs and risks.
