Tuesday, June 26, 2012

I got a California LLC and trust or will online. That protects my assets and will save my home, right?…Wrong

People often misunderstand the different common tools used and how they all fit together when it comes to asset protection and estate planning, as well as business structures and succession planning, not to mention, tax planning and insurance coverage.

These are all very complex legal and financial issues that often mix, combine, and cross-over from one area to another. You can go online, get templates or find document preparation companies that can give you a standard form will, living trust, corporate formation, or limited liability company (LLC) formation document. True, that may be better than nothing, but is that really an effective way to deal with some of the most important issues of our lives, and those which most of us don’t want to think about…”What will happen to my stuff when I die and how can I keep as much of what I accumulate during my lifetime?”

Let’s look at a common example, a living trust (often called a family trust) can save your kids time and money in having to put your estate through the legal probate process in court when you die. In California, in most cases, the assets owned by someone when they die with or without a will are “probated” in court. This is the way to administer the terms of the will or state law on distribution of assets; however, state law provides automatic legal fees and certain costs, often simply based upon the value of the assets without deducting the debts owed. That can mean thousands or tens of thousands of dollars in costs for a so-called “simple” estate with one home worth $500,000. People use a written agreement, called a living trust, that tells a trustee what to do with their assets when they die and can help avoid having to go to court to probate the will. This saves time and money and keeps who gets what private, instead of becoming part of a court record somewhere.

In this example, people go online and get a trust then set it aside thinking everything is taken care of. There are so many more complex issues, even with a relatively small estate. If you own a home or car, simply transferring the asset into the trust only provides for who gets that asset when you die. It does not protect that asset from the reaches of creditors. With the ridiculous amount of lawsuits in the United States (over 30 million lawsuits filed per year in the US), all it takes is someone getting hurt at your home or in a car accident that your insurance company decides not to cover, or the suit awards more money to the plaintiff than your insurance covers, and suddenly all of your assets are in jeopardy. The trust in that case is simply an estate planning or asset transfer vehicle to give things to your kids to avoid probate. It was not planned as a protection from creditors who could foreclose on the home after your insurance company goes out of business (AIG almost went out of business & many insurance companies fail every year).

When it comes to businesses, forming a LLC or corporation is often a useful way to structure the business and separate the business from your personal affairs. It typically provides limited liability to protect your personal assets from the business’ creditors; however, if a lawyer can show that the LLC is really the same as your own personal business and not a separate entity, the LLC protection goes away. Also, if a creditor gets a judgment against you that you can’t pay, the creditor is going to go after your ownership interest in the LLC. Suddenly, the creditor owns your LLC or holds a lien against its assets or revenue. That could basically shut your company down. Even if you figure you can just file a bankruptcy to wipe out the debt, there are many types of debts that cannot be eliminated in bankruptcy and the court looks to your current income and assets to see what you can pay creditors.

Another interesting case, you forgot to disclose something on your insurance or bank credit application. Your insurance pays a claim or you take out a large sum on credit and the insurance company or bank find out about the forgotten disclosure (or outright lie). Suddenly the bank or insurance company are suing you for fraud and their money back, which cannot be discharged, even in bankruptcy. Many of the recent homeowners who have been up in arms about the wrongs the banks did with the foreclosure mess may not realize that they likely signed loan applications on stated income saying they made a certain amount of money that was exaggerated. The bank relied upon their representation of how much they made to determine they were credit worthy. The bank could sue the homeowner for fraud.

This is not to say you should do nothing. You can still setup a living trust for estate planning purposes or form a LLC to structure your business, but there are other tax planning and asset protection tools that can be used to avoid losing your home or business to some plaintiff’s lawyer.

Solid financial planning for the future involves more than figuring out who gets your stuff when you’re gone and how much you should spend each month or put in your 401k. A good financial plan for your future looks at all aspects of your life to consider: cash flow, budgeting (estate conservation), retirement, credit, estate plan, asset protection, business succession plan, business protection and structure, taxation, insurance coverage, and overall risk management. Many people wait until its too late and their lives are turned upside down. Even if you don’t have much or are young, consider talking to a financial planner who can cover all the legal, financial, business, insurance, and tax issues to plan today for all your tomorrows.  

Schedule a Free Initial Consultation to discuss your tomorrow:
Chris Barsness, Esq. MBA, Senior Associate
Barth Calderon, LLP

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