December 2017 Volume XI No. 4 Taking Care of Business
        
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What Does Everyone Need to Understand About Asset Protection?

After working hard and accumulating assets for many decades, it is not uncommon for our thoughts to turn to the question: “How I can protect my assets.” We all hear stories from colleagues and friends about the business person who lost everything when their business failed or who suffered a large judgment due to a personal injury and lost significant assets. In one form or another, we all have asset protection sitting uncomfortably in the back of our minds.

The main reason these fears go unresolved is that asset protection involves an extremely complex and evolving mesh of federal and state laws and Court decisions. While this article cannot reconcile all these complexities, it will convey some critical steps you can take to protect yourself.

Assume today you injured someone in a car accident or were served as the defendant in a lawsuit, there are two key questions: 1) do you have adequate insurance coverage for this potential liability? and 2) do you understand it is most likely too late to undertake any asset protection planning?

It is a typical, but wrong, gut reaction to try to move assets to protect them after an incident. People’s first thoughts are to transfer assets into the name of their spouse or children. There are two reasons this is a bad idea: 1) once the claim has arisen, the Indiana Uniform Voidable Transaction Act (I.C. 32-18-2) allows the creditor to void your transfer so it is not likely to do any good whatsoever; 2) when moving assets you are very likely to convert assets that are protected from your creditors to assets that your creditors can seize. For these reasons you should avoid your initial instinct to give your assets to others to “protect” them.

Certain assets you own are already well protected and their ownership should not be altered. These include your personal residence owned with your spouse. This property is designated as Tenancy by the Entireties Real Estate and can only be attached if your creditor has a judgment against both you and your spouse. In most circumstances, this property would continue to be protected and its ownership should not be disturbed.

A second asset that is largely or completely exempt from your creditor claims is your retirement accounts. Please note if you inherited a retirement account from someone else (i.e. an “inherited IRA”) those accounts are NOT exempt from your creditor claims. Under Indiana law, the exemption for these retirement accounts is unlimited outside of bankruptcy, and in 2017 limited to $1,283,025 if you were to file a bankruptcy petition.

The third asset that is protected is the Proceeds and Avails of a life insurance policy (I.C. 27-1-12-14(e)). These protected benefits include the death benefit, cash surrender and loan values, premiums waived, and dividends not received in cash

As stated above, after an incident takes place you do not want to divest one of these protected forms of assets, nor do you want to attempt to create them after an incident. In all circumstances, seek legal advice before you act.

With an eye toward planning in a non-emergency situation, you may want to consider the following:

1)  Verify that you have adequate liability insurance. If you do not have an “umbrella policy” you should consider obtaining one.

2)  If you are NOT holding your residence as Tenancy by the Entireties Real Estate, or in an Indiana trust that qualifies as a “Matrimonial Trust” under I.C. 30-4-3-35 (effective July 1, 2010) you should consider doing so BEFORE an incident arises. If you executed an estate plan where your residence was placed in trust prior to 2010, you should verify that the transfer was modified to qualify as a transfer to a Matrimonial Trust as soon as possible.

3)  Indiana does not currently offer the option for a Self-Settled Asset Protection Trust, but approximately seventeen other states do offer some version of this type of trust. However, even creation of such a trust could be subject to a four or even ten year lookback period, so specialized legal representation would be necessary in such matters.

When considering asset protection, first be careful not to expose assets that are already protected. Second, take simple steps to obtain proper insurance coverage and proper titling of assets. Third, if you have a desire for even more asset protection, do not attempt to do so without specialized legal counsel.

If you have questions regarding the contents of this article, or other similar issues, please contact your HWE relationship attorney or visit us at http://www.hwelaw.com.

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Minding Your Own Business: The Importance of Ownership Agreements for Small Businesses

Starting a new business is easy, especially in the Internet age. Go to the Secretary of State’s website, fill out a few forms, pay a filing fee, and boom – you are now the proud owner of a corporation, limited liability company, or limited liability partnership. But protecting your new business is a different matter. Few things are worse than investing your life’s savings into a new business only to find out years later that your business was not properly protected. For this reason, and many others, drafting appropriate shareholder, member, and partnership agreements is critical to protecting your business and the dreams you have for it.

Let’s take a basic corporation as an example. A corporation is formed by filing articles of incorporation. The articles specify basic matters regarding the corporation’s powers. A corporation also has bylaws, which will specify things like how many people serve on the company’s Board of Directors, the method of setting shareholder and director meetings, the process for dividends, and a variety of other matters.

However, these documents rarely provide all of the protection that a business owner needs. Suppose you and a friend form a corporation, with each of you owning 50%. At the beginning, you are likely on good terms. However, the good vibes won’t last forever. What happens when your friend wants to sell her shares to a third party that you don’t like or who doesn’t understand your business?

This is where ownership agreements can play an important role. Shareholders in Indiana corporations can enter into shareholder agreements governing the ownership and transfer of shares, voting rights, how to resolve disputes, and a variety of other things. The same is true for limited liability companies and limited partnerships, which can prepare operating agreements and partnership agreements, respectively.

In our example above, you and your friend can enter into a shareholder agreement requiring the selling shareholder to offer to sell to the other shareholders before selling to a third party. If you want to have more control, you can require company approval before any sale – as long as the requirement is not manifestly unreasonable. Be aware that Indiana law places restrictions on things that shareholders, LLC members, or partners can do.

It’s also important to think through your agreements. Suppose your shareholder agreement says that business decisions must be unanimous and, if they are not, then the disagreeing shareholder must sell their shares to the company. Sounds like good protection against an unreasonable partner, right? But what happens when your “friend” wants a salary of $200,000 per year, even though the company can’t afford it? If you disagree, you may have to sell; if you don’t, you may go out of business. Either way, you may end up in a very expensive lawsuit. A well-drafted agreement can prevent this situation before it occurs by limiting compensation or limiting the types of disagreements that will trigger a buy-out.

For these reasons and more, consult with an attorney before drafting important business agreements and whenever your business needs change. It’s still true that “an ounce of prevention is worth a pound of cure.”

If you have questions regarding the contents of this article, or other similar issues, please contact your HWE relationship attorney or visit us at http://www.hwelaw.com.

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DISCLAIMER: This publication is not intended to be legal advice but is presented for informational and educational purposes only. The facts and circumstances of a specific legal issue are unique and you should seek legal advice for your specific questions or concerns. No attorney-client relationship is created.