A lot of clients start our meetings with “what can I do to protect myself from liability?” While all of them understand that having “liability” may be a bad thing, most do not know what exactly that means. Liability is just another way of saying responsibility. Responsibility may come in many forms: in business, in personal affairs, and through the various relationships we establish in our daily lives. While there are many ways to determine who is liable in any given situation, by far, the strongest determining factor is: who has control?
Where Creditors arise:
A client who has undertaken little, if any, planning may be involved with a number of scenarios in his life: he may run a small business, he may have three or four children with his wife, he may participate in extracurricular activities, and he may travel on a daily basis. All of these activities create relationships, and with these relationships, he creates and establishes creditors. If he has done no planning and established no barriers—his creditors do not recognize his personal affairs from his business affairs. This means that any creditor of his may assert a claim against his interest in assets that he owns in order to satisfy a debt.
Some of you may think, why would I need to plan? I don’t break the rules, I pay my bills, I otherwise conduct myself lawfully; I do not need to be concerned with creditors. While all of that may be good and true for you—that may not be enough to protect you against a creditor’s claim. What if you were in an accident? What if a partner of yours suddenly finds himself in the middle of a divorce? There are many unforeseen scenarios that can turn an otherwise simple estate upside down.
How to plan:
There are a few ways you can plan to provide protections against creditors. One of the first ways is to minimize your exposure and separate your creditors—establish separate business entities to hold your separate business assets. By establishing and using business entities, you can ensure business creditors may only reach business assets; likewise, personal creditors may only reach personal assets. The more separation you have in your affairs, the smaller the “pot” becomes for recovery purposes, as you’ve segregated your former single estate into various little portions, each exposed only to its own specific creditor. Further, business entities are often structured so business creditors may only have the ability to get at monies finally distributed from the entity; creditors then enjoy no ability to control the business’ decision to distribute those monies.
Still need more protection? Another way to plan is through the use of irrevocable trusts in your estate. The only way to truly limit your exposure to liability is not to own anything; after all, who can get blood from a stone? However, clients are often loathe to divest themselves of all their assets and understandably so. While giving all of your assets away may not be practical, there are ways to accomplish ownership and use of assets without control. And if you don’t have control over something, neither do your creditors.
Any liability planning in your own estate should be carefully considered and undertaken with counsel. This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon, Jeffrey Roth, and Jessica Moon are members in the law firm of Roth and Bacon Attorneys, LLC. Their Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning.
Copyright @ Jessica B. Moon 2013.