We receive lots of queries from people who are struggling with the important issues of asset protection and estate planning. Periodically, we’ll try to answer some of those questions for everyone to learn from, or at least help you see options that you need to discuss with your own trusted advisors. Here’s the first of several we’ll post on this blog.
Q. We are a small manufacturer, unable to purchase product liability insurance, with full ownership of house and property. If I create a trust and make our daughter the trustee, is this a viable form of asset protection?
A. Having your own business is risky and without the ability to purchase liability insurance, your home and other property may be at risk. You should certainly operate your business as a corporation or limited liability company (LLC). If the entity is properly maintained, it should protect your personal assets from business problems. The problem is, the company’s creditors will make you sign personally for all of the accounts and loans, thus the personal assets are at risk. The product liability insurance wouldn’t cover those things anyway. Unless the product is very dangerous, and the judgments will be huge, the company structure should protect the owners and their personal assets in a product liability suit.
I understand what you are saying. Never take your home out of your name and put your daughter’s name on it for any reason. If you don’t own it, it’s not your personal residence. You lose a bunch of benefits that the government gives home owners. Another problem is that if your daughter gets in trouble, gets in an accident or gets divorced your home is at risk.
If you put the home and other assets in a trust with your daughter as the trustee, this won’t give you any more asset protection. The trust will NOT be a grantor trust any more if your daughter is trustee, and technically will need to file its own tax return, and a bunch of other stuff. As trustee, your assets are not subject to her personal issues like the assets would be exposed if they were just in her name.
Without knowing all of your details I suspect the best solution might be to structure your business so it is in your name only. Never have your spouse involved in the business and try real hard not to have the nonparticipating spouse sign on any loans or anything associated with the business. You should have a his and her trust (one trust for each spouse) and put the high liability items in your trust and your home, cabin, bank account, etc. in your wife’s trust. This acts as a good liability shield in common law states. My best selling book, Guaranteed Millionaire, goes through the various options you have for forming a liability shield, using different business structures, and gives you a good framework for getting it done. Of course, the Accumulation and Preservation of Wealth has a ton of information on all this stuff. Make sure you listen to the CDs.
Q. How can I keep control of all my assets without being subject to the liability? Can some fashion of this solution also provide protection from probate?
A. You asked how you can keep control of all your assets without being subject to the liability. Of course it depends what you are trying to protect. If it is your home, a trust is a very good vehicle to avoid probate, but it won’t give you any asset protection. You can move ownership to the husband’s or wife’s trust and protect it from the other spouse’s liabilities (usually not the mortgages, because you have both signed the loans). Do not put your home in a “company.” You usually want to keep your home in your name (trust’s name) so you can keep the tax benefits. If it is a business or a rental property, then an LLC works well and gives great liability protection if the LLC owns the property. Without knowing your family situation it is hard to give a more definitive answer. This is one reason why I wrote Guaranteed Millionaire. It goes through the various asset protection scenarios so you can see the various options that work. The trust will protect you from probate. Depending upon the asset, a corporation or preferably an LLC will help you protect it.
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