Asset protection involves securing your business and assets from losses due to creditors, lawsuits, and bankruptcies. This is especially important for business owners and professionals who may be at risk for lawsuits due to the nature of their work. While no one wants to believe that they might be sued by a creditor or customer, it is important to plan ahead for these events because even a frivolous lawsuit that is ultimately dismissed can be expensive to defend. Employing careful legal strategies can prevent losses from such events.
Legal strategies such as creating a trust can help protect assets from creditors. For business owners, incorporating a business and maintaining liability insurance can prevent an individual business owner from becoming personally liable for business losses.
Some assets are exempt from creditors under state and federal law. For example, some personal items such as household furnishings, clothing, jewelry, and tools of a person's trade are exempt assets that cannot be reached by creditors. Under Tennessee law, up to $5,000 of home equity for individuals and up to $7,500 for married or joint owners is exempt. This is very low compared to other states. Life insurance benefits payable to a child or spouse are also exempt.
Liability for Professionals and Business Owners
Many professionals operate their businesses as sole proprietors rather than as a corporation. Some business owners may prefer the simplicity and informality of operating a business as a sole proprietor. However, doing so comes with risks, particularly if the business is ever sued. Creating a legal entity such as a corporation or professional corporation, limited liability company or professional limited liability company, or limited liability partnership provides additional protection from creditors compared to a sole proprietorship that is not an incorporated business entity. A sole proprietor who is sued risks losing personal assets, but if their business is incorporated, the legal entity must be sued instead of the business owner.
There are many things to take into consideration when creating a corporation or other legal entity – such as how taxes will be paid - since the tax regulations for different types of entities differ. Tax laws frequently change, so if you are considering incorporating your business, you should speak with an attorney about how choosing a particular type of business entity for incorporating your business could affect the way you pay your taxes. Even sole proprietors or home-based business owners can benefit from creating a legal entity to separate their personal assets and debts from those of their business.
Another way to protect personal assets from creditors is to maintain professional liability insurance. Some professions do not require maintaining an insurance policy, but failing to maintain liability insurance can create an unnecessary risk of loss in the event that a business is sued. It is important to make sure that professional liability insurance is current and to understand exactly what it covers. Business owners who maintain their business at a physical location should also evaluate how their business liability insurance will protect them in the event of a premises liability claim.
Risk Management and Asset Protection Trusts
Asset protection trusts are another way that individuals and business owners can protect assets from creditors. Tennessee is one of several states that has enacted legislation that favors the creation of self-settled trusts for asset protection. A self-settled asset protection trust is one in which the trust grantor who places property into the trust is also the beneficiary.
The rules for setting up a self-settled asset protection trust are governed by the Tennessee Investment Services Act. A qualified trustee, typically a Tennessee resident, corporation, or financial institution, must be appointed. Trusts under this act must be irrevocable, but the trust grantor will still retain certain rights, such as the right to remove or appoint a trustee, and can act as an investment adviser to the trust.
A trust grantor who creates a trust pursuant to the Tennessee Investment Services Act must sign a “qualified affidavit” stating the following:
- that they have full authority to transfer funds into the trust,
- that they are not creating the trust to defraud a creditor,
- that they will not be rendered insolvent by depositing funds into the trust,
- that they are not involved in any administrative proceedings other than those listed in the affidavit,
- that they do not intend to file bankruptcy, and
- that they did not obtain the assets to be deposited into the trust through unlawful activities.
Contact an Estate Planning and Asset Protection Attorney
If you have questions about asset protection or need assistance with estate planning in Arizona, Alaska, California, Colorado, Oregon, or Tennessee, contact Nina Whitehurst at Cumberland Legacy Law, located in Crossville, Tennessee. You can use our online form to schedule a consultation or call us at (931) 250-8585.