We Live in a Highly Litigious Society
In this day and age, everyone is concerned about protection of their assets. We live in a litigation heavy society where people sue at the drop of a hat. Without proper protection, an unanticipated lawsuit can destroy a family’s entire life savings. Here is a classic example that I have seen multiple times during my career:
Billy, John and Jane’s 17-year old son, was driving down the highway. Like many teenagers his age, he did not understand the danger of texting while driving. As a result, on one faithful day, Billy was texting while driving, and rear-ended a minivan carrying a family of four. Billy was not hurt in the accident. However, out of an abundance of caution, the two small children in the minivan were taken to the hospital. At the hospital, it was discovered that both children had some internal injuries that required surgery. At the end, the children were fine, but incurred significant medical bills. Several months later, John and Jane were served with a lawsuit for damages resulting from Billy’s car accident. The lawsuit was alleging $3 million in damages. Unfortunately, John and Jane only had insurance coverage with a limit of $300,000. Following a trial, the jury awarded the family in the minivan a total of $1,000,000 in damages. John and Jane’s insurance paid the first $300,000. However, John and Jane were personally on the hook for $700,000 in unpaid damages. In the end, John and Jane had to clean out their life savings of $250,000 to pay the judgment. Next, John and Jane’s wages were garnished to pay the outstanding amount. Finally, John and Jane had no choice but to file for bankruptcy. John and Jane’s entire life savings and financial security was wiped out because they failed to engage in proper asset protection strategies.
Asset Protection for Rental Properties
When you own rental properties, you have specific asset protection concerns. There are many real estate investors in Tennessee that do not realize that they need to engage in asset protection with regard to their rental properties. Many real estate investors feel that all they need to do obtain the appropriate amount of insurance coverage for each rental property that they own in order to protect their assets from lawsuits from their tenants or any other person that may be seeking to sue them.
However, having the correct amount of insurance is only step one of your asset protection strategy. Real estate investors should have a comprehensive asset protection strategy. For instance, what if the insurance coverage is inadequate to cover the damages, or worse, what if the insurance company deems that you did something wrong and denies coverage altogether? If you do not have a comprehensive asset protection strategy, you could be held personally liable and completely wiped out financially!
For real estate investors, a Limited Liability Company (LLC) or a Series Limited Liability Companies could be one strategy that you could pursue. An LLC can be a sufficient asset protection vehicle to insulate you from personal liability in the event of liability regarding one of your real estate investments. To illustrate, let me tell you the story of Bill Doe.
Bill Doe was a real estate investor. Bill had 15 rental properties, all of which were fully leased by tenants. However, Bill was very smart and always sought out competent professional advice regarding his business. Bill had been successful in business and had created a wealth of $3 million that he wanted to protect. However, Bill also had his real estate investment business. Therefore, Bill met with an attorney who advised him that he had exposure to personal liability with the rental properties being titled in his own name. The attorney recommended a series of Family LLCs. Bill set up five LLCs, each of which held five of his rental properties. Bill paid the registration fee and paid the annual fee once a year for each LLC. However, one day, Bill was served with a lawsuit regarding one of his rental properties. One of his tenants slipped and fell down the stairs outside was suing Bill and Bill’s LLC. As a result, Bill contacted his insurance company and spoke with the insurance company’s attorney. The first thing that Bill’s attorney did was file a motion to dismiss the case against Bill personally. You see, as the rental properties were titled in the name of Bills’ LLC, Bill could not be sued or held personally liable. In the end, Bill’s insurance paid out a nuisance settlement to the tenant. However, had the insurance been insufficient to pay the judgment to the tenant, only the assets of the LLC could be seized to pay the judgment. Bill’s personal assets, including his personal wealth of $3 million, would be completed protected!
Asset Protection for Businesses
Business owners have significant asset protection concerns. Depending upon the business that you are in and the levels of risk that you have, a comprehensive asset protection strategy is the most important investment you can make for your business. One of these asset protection strategies include the proper structuring and use of holding companies and operating companies. In this arrangement, the holding company would own all the assets of the business and would then lease those assets to the operating company who then uses those assets in the operation of the business. This can be further designed in such a way where the holding company is a corporation and the holding company is an LLC, whereby the holding company corporation is a member of the LLC.
For example, let’s discuss the story of John Doe & Sons Construction.
John Doe and his two sons, Bill and Dan, work in a construction company. John is the 100% owner and intends on passing this business to his two sons when he’s gone or when he retires. One day, John visited his attorney and realized that his business was unnecessarily subjected and exposed to liability. Therefore, John set up a holding company called John Doe & Sons., Co. The holding company owned all the assets including the real estate, equipment, and a variety of other assets that the company needed to operate. John also set up the operating company called John Doe & Sons Construction, LLC. John Doe & Sons, Co. leased the equipment and assets to John Doe & Sons Construction, LLC. In essence, the assets of John Doe & Sons Construction, LLC were minimal. As a result, when John Doe & Sons Construction, LLC was sued for $5 million, the assets of John’s business were further protected as all the assets of the business were owned by John Doe & Sons Co. and not John Doe & Sons Construction, LLC (the operating company). This arrangement provided John with a high level of asset protection and limitation of exposure to liability.
Each business needs to engage in proper asset protection and entity structuring strategy in order to provide the utmost protection from liability.
Tennessee Investment Services Trust (The Tennessee Asset Protection Trust)
One of the more talked about topics in recent years is the Tennessee Investment Services Trust, commonly referred to as the Tennessee Asset Protection Trust. This is a trust created by the Tennessee legislature that allows an almost impenetrable protection of assets in the trust. The trust allows you transfer assets into a trust that can provide protection of those assets from lawsuits, creditors, spousal claims in divorce, and a variety of other type of predators against your assets. However, the trust has very specific terms and limitations.
The following is a list of the main requirements of the Tennessee Investment Services Trust:
- The trust must be governed by Tennessee law;
- The trust must be irrevocable;
- The trust must have a spendthrift clause;
- The trust must have a qualified trustee;
- The trust must be accompanied by an executed affidavit stating that the creation of this trust will not render the settlor (creator of the trust) insolvent;
- The qualified trustee must be a Tennessee resident or a corporate trustee licensed in Tennessee;
- And the qualified trustee must have at least some duties that include holding the assets, preparing the tax returns, and be the person or entity that administers the trust
The key limitation is that the settlor (creator of the trust) cannot be the trustee. Although, even given the limitation, the asset protection qualities are immense.
Once an asset has been transferred to a trust, and more than two years has transpired since the transfer, any creditor is forever barred from brining a claim against the assets of the trust. This has the effect of creating a trust with assets that would be impenetrable from creditors?
Call Asset Protection Attorney Daniel Perry
Many people think asset protection is not for them. Perhaps, they may be stuck with the perception that asset protection is only for the extremely wealthy and those who own large corporations. However, asset protection is for everyone who desires to protect what they spent a lifetime accumulating. If you want to lose your assets to creditors, a frivolous lawsuit, or perhaps a fender bender car accident, then yes, perhaps asset protection is not for you. However, if you do want to protect what you worked so hard to save and accumulate for your family, then you should investigate the appropriate asset protection strategy for you and your family.
In your first meeting with Dan, he will ask you what you want to see happen to your assets, how you want to protect the wealth that you have accumulated, and then will propose a suggestion on the best way to accomplish those goals. At that point, and only at that point, will the financial arrangements be discussed regarding the proposed legal services. You will always leave every meeting with Dan and his team knowing, crystal clear, the legal services involved, the financial arrangement involved, and the time table for completion.
Call Our Brentwood, Tennessee Office Today at 615-490-0477 to get started.