Asset protection strategies help individuals and business owners from reducing chances of creditors and predators from taking their hard-earned wealth and money against. However, many business owners unknowingly make mistakes that jeopardize their financial security and stability.
In this article, we will discuss the top 5 most common legal vehicles used, and how to protect one’s assets from liens and seizures.
REVOCABLE LIVING TRUST
A Trust is created where assets are transferred to the interest of another for the primarily benefit of a third person, the beneficiary. When a Trust is created by the grantor while being alive, it is called a Living Trust. When the grantor retains the right to dissolve the trust, then it is called the Revocable Living Trust. It is important in estate planning since it gives the grantor control over the property while alive, it distributes the assets upon death and it merely passes the property to the beneficiaries without probate. While it is a great tool, it does not protect the assets from liens and seizure.
Under Section 112.035 (d) (2) of the Texas Property Code, one cannot create a living trust for oneself in order to protect his/her assets. Why? This is to prevent an individual from escaping for liabilities against creditors’ claims.
How to correct: Trustor becomes the beneficiary of the trust solely by virtue of the SPA by a third party. In addition, you can create an Irrevocable trust which restricts you from getting full control over the property.
INSURANCE
Insurance is one of the most straightforward asset protection strategies. It can be the first line of defense in the event that an individual or an entity sues you or your business. Insurance shields you from any potential financial losses due to lawsuits. However, it does not end there. Most of the insurance policies contain limits and exclusions. This can somehow give false sense of security to the clients, especially if they haven’t read the entirety of the policy and merely rely on the insurance provider.
How to correct: We recommend that clients buy an umbrella insurance or various insurance policies to provide additional protection from any liabilities arising from any lawsuit beyond what has been provided by basic insurance policies.
TRANSFERRING ASSETS
Transferring assets from one person to another is not bad per se. However, under the Section 4(a)(1) of Uniform Fraudulent Transfer Act, if transfer is made with the intent to hinder, delay or defraud any creditor, it may be considered a Fraudulent Conveyance. The creditor does not need to prove actual fraudulent intent since the court can infer from the UFTA lists badges of fraud.
CREATING AN LLC WITHOUT PROPER DOCUMENTS IN PLACE
While creating a Limited Liability Company does provide legal protection against your personal assets, it does not not immediately mean your company’s assets will automatically be protected. Having a well drafted operating agreement outlining terms for to protect those company assets.
How to correct: Consult with a Business Attorney and discuss the appropriate business structure and management, ensuring that essential provisions for running your business and adequate protections are put in place.
COMMINGLING BUSINESS AND PERSONAL INTERESTS
One of the most common problems is when one pays for personal transactions from a business account. This typical act exists due to the common misconception that once an individual creates an entity, he/she thinks that they are one, including the funds. When this happens, you may lose the liability protection given by the Texas law to the entity. It may open up to the “piercing of the corporate veil” doctrine. A pierced veil means the business and the owners are one, not separate. Accordingly, you may be held liable personally instead of the properties and anything in between in the business only.
How to correct: Make a separate bank account, maintain proper and accurate financial records, and accurate accounting of all the expenses.
Navigating the intricate landscape of asset protection in Texas can be challenging. Individuals and businesses often fall prey to the common mistakes in protecting one’s assets. Nonetheless, knowing and avoiding the common asset protection mistakes are crucial in safeguarding your wealth and ensuring your financial security and stability. As such, consulting legal and financial experts is key to developing a tailored asset protection plan based on your needs.
At Texas Real Estate and Business Law Firm, PLLC, our attorneys are here to help and guide you. Call 832.205.8144 or schedule a consultation at treb.cliogrow.com/book.
DISCLAIMER: This article is not meant to provide legal advice or substitute the same. It is only intended to provide the public basic information on the topic discussed. If you happen to experience the same scenario or have more questions and clarifications, please call us!
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