The Top Five Asset Protection Strategies For The Owners Of A Closely Held Business
The owners of a closely held business that is operated as an “S” corporation may be the targets of lawsuits that will drain their insurance policies, that may even exceed the limits of their insurance policies and that may cause them sleepless nights. What steps should these business owners take so that if something goes wrong, they will not lose all or most of the assets that they have worked so long to accumulate?
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- Qualified Personal Residence Trust (“QPRT”). The personal residence, and up to two vacation residences should be transferred to a QPRT.
- Family Limited Partnership (or FLLC). The investment real estate and investment liquid assets should be transferred to an FLP or FLLC, with the parents (or their living trust) being only limited partners (or non-managing members).
- Defined Benefit Pension Plan. A DBPP allows the largest deductions for the closely held business. Any tax qualified employee retirement plan (think O.J. Simpson) is protected from all creditors (except orders for child and spousal support and the U.S. government) as long as one rank and file employee is covered.
- Private Retirement Trust. Under California law a PRT can be used to protect the receivables and hard assets of the closely held business. For non-California businesses a similar result can be achieved using a children’s trust or an FLP.
- Recapitalization. The parents should exchange their 100 shares of common voting stock for 1 share of voting stock and 99 shares of non-voting stock. There is no one correct next move. There are lots of attractive alternatives. For example, the parents might gift the 1 voting share to an irrevocable trust for the children and enter into a buy-sell agreement that strongly favors the children’s trust.
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Really good question, Bill. We think it’s too early to mieilnate two-trust arrangements yet, but mostly because the tax law is once again set to switch back in two years. Assuming Congress gets it together enough to come up with a solution that is at least semi-permanent, and that it includes the portability provision (probably good assumptions, but let’s not count on them yet) it may be time to review the decision. So wait a year or so.In the meantime, existing credit shelter trusts can’t just be mieilnated. If one spouse has died and a credit shelter trust has already been created (or was supposed to be created because of the terms of the deceased spouse’s will or trust), then the surviving spouse should talk to a lawyer with considerable estate planning and trust administration experience.QTIP trusts are another question altogether, as your post indicates. Best to talk with your estate planning attorney about that issue.While one apparent goal of Congress was to make planning easier, they have failed so far. Sorry to answer that you need more legal advice, but that is probably the case for the next two years. After that, we’ll have to wait to see.