I was recently speaking with a couple from right here in Nashville regarding their estate planning. This couple had saved up roughly $500,000 in various bank accounts, annuities, investments, and other assets. In addition, this couple had a home worth about $250,000 and each also had a life insurance policy naming the other as sole beneficiary in the amount of $1 million. However, the husband also owned a small business that he had operated for about 20 years. When I asked the husband if I could review his business organization documents, the husband informed me that he operated the business as a sole proprietor and always filed his taxes under his social security number.
At this point, I began to discuss with this couple that operating a business as a sole proprietor is a little like playing Russian roulette, and that eventually he was going to get hurt. I explained that in the event that his business is sued, all of his personal assets that he and his wife hold personally are potentially at risk. I continued to discuss with them that in the event of a lawsuit against the business that they unsuccessfully defend, a judgment could be obtained against the business, and since he is a sole proprietor, the successful party could go after all the business assets as well as his personal assets in order to satisfy the judgment.
I continued to explain, and this couple agreed, that this was a serious legal issue that needed to be addressed immediately. The solution that I recommended for this family was to organize their business under Tennessee law as corporation or as a limited liability company. I explained that if the business was organized as a corporation or as a limited liability company under Tennessee law, and the business was sued, then only the assets of the business would be subject to seizure and loss from a lawsuit. In addition, their personal assets would never be at risk due a lawsuit as a result of negligent acts in the operation of the business. I also discussed with this family that there are important tax benefits to organizing the business in this manner.
In addition, I discussed with this family that this asset protection strategy that we discussed is important as part of their overall estate planning strategy for their loved ones. Earlier, this couple discussed the importance of making the estate settlement process simple for their family and avoiding probate as they experienced a nightmare situation of the probate of the wife’s mother’s estate taking over 3 years and nearly $85,000 in costs and expenses. Therefore, I recommended a possible solution, in addition to the asset protection strategy that we discussed earlier, to put a revocable living trust in place and fund that trust with all of the family assets so that the probate process was completely avoided.
This couple was extremely excited and relieved to realize that a plan could be put in place now to protect their personal assets and provide a smooth transition to their loved ones after they are gone with little to no government intrusion, as well as save their families tens of thousands of dollars.