Top 2 Ways Texas Business People Can Protect their Families from Company Mistakes


Top 2 Ways Business People Can Protect their Families from Company Mistakes

Entity Formation layered with a Trust

First Line of Defense – Entity Formation

The first, and most obvious, way to protect your family and your personal assets from the liabilities associated with operating a business is to form an entity other than a sole proprietorship.  It is that simple.  Just do it.  I am happy to help you determine what is best for your entity.

Second Line of Defense – Estate Planning with a Trust

The second best way to protect your family and assets from your company is to engage in some estate planning.  Jim Norman, a great estate planning attorney in Austin, and I have some recommendations based on some work that we have done.

Living trusts have a bad connotation for some folks because of the people peddling them but the reality is that they are still a good protection mechanism for some folks who have multi-jurisdictional assets.  Without a trust, all of your assets will pass through some form of probate in the jurisdiction in which they reside with an attorney from that jurisdiction. This makes multi-jurisdictional estate resolution an expensive and burdensome process. A trust, however, only generally operates in one jurisdiction and is not mortal.  As a result, a trust only “dies” when it is supposed to and only distributes assets when it is supposed to 

The biggest issue a living trust may solve for you is asset protection but you must treat the trust like a trust, just as you must treat your business entity like a business entity.  More specifically, a revocable trust that is controlled entirely by the business owner may be deemed in court to be a mere façade and not a separate asset-owning unit.  Giving up control of your life’s assets to an independent trustee can be an unnerving proposition to the entrepreneurial type but it is becoming the norm within certain professions, such as physicians. All of this becomes more and more important as you approach retirement or collect substantial assets because, let’s face it, it isn’t worth anyone’s time to sue you when you are a pauper. 

A few other nuanced issues that should be considered when contemplating establishing a trust to protect your personal assets from your business liability:

  • Be careful about how beneficiaries eventually receive your trust assets.  If your beneficiary works in an extremely risky industry it may be prudent to make sure assets stay protected in a trust.
  • There are creative ways to use a trust or similar instrument to minimize the estate tax consequences of passing on your family business or other assets. For example, if you put your one-half ownership interest of your house into a family limited partnership, the value of that interest for tax purposes plummets because the fair market value of half a house is much diminished.
  • Even if your work is not particularly dangerous work and you aren’t particularly profitable, you may consider establishing a trust to protect your personal assets if your business has been around for a while. The longer a business has been around, the more opportunity there is for old grievances to arise in the form of lawsuits.
  • Considerations should be made for your trust as it relates to your risk of disability.  If an entrepreneur becomes disabled, he will likely loose his revenue stream so he needs to be sure his trust assets will become easily available to him to him to overcome the shortfall.

A trust can be the ideal tool to protect the assets of an entrepreneur but it is a many faceted proposition.  I highly recommend requiring that your business’s attorney and your estate attorney to work collaboratively and ensure you are adequately protected in all regards. 

Feel free to contact Austin attorney Jim Norman at 512.329.2024 or to discuss personal asset protection.

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