Frequently, when someone learns they’re being sued, their first instinct is to protect their assets — their home, car, jewelry, or their business, the building, office equipment, and company vehicles. Whether it’s a civil litigation, bankruptcy proceedings, or even a divorce, there’s a very real possibility of losing everything to creditors or in a civil judgment.
The easiest solution is to have separate holding companies that hold your assets with specific assets being grouped together based upon common business themes. For example, if you had your own business, you would have a separate holding company that owned your building, or the equipment, or the vehicles, or the office furniture, and so on. You would then rent and/or lease all those items from the holding company to the company that is performing the work.
For example, a Real Estate holding company holds the property, then leases the property to another company which then rents part of the property or uses the property. When or if the company gets sued in performing its daily operations, it does not own the Real Estate in which the business is located but rather it is simply paying rent, so that creates a barrier to the real estate being an asset of the company and keeps the property off of the company’s books.
When structuring assets, the time to do that is now, before a lawsuit ever crosses your desk. Creating a holding company (or several layers of companies) the moment you’re sued, or even a short time before, can look terribly suspicious.
If you have sold or transferred your assets to another company, a family member, or even a business colleague in order to avoid creditors or paying a judgment, that’s called a fraudulent conveyance. A Fraudulent conveyance is the transfer of assets out of your name as a way to prevent creditors or plaintiffs from seizing them.
People often do this by selling their house to a parent for $1, or putting a portion of their money in their children’s names or transferring their portion of their business to their spouse or business, just to name a few examples. If the creditors or plaintiff can prove you did this, those sales and transfers can be set aside, and your assets can be seized anyway.
When a judge investigates the possibility of fraudulent conveyance, they want to determine whether an asset transfer was done legally in light of the current litigation. They look for things like whether the asset sales or holding corporation creation happened shortly before or immediately after the lawsuit, or whether the sales payments are unusually small and not based upon the fair market value of the asset that is being transferred.
However, sometimes it’s just a matter of bad timing. If you just signed the papers to create your asset protection plan, and you’re involved in a car accident on the way home, that’s bad luck, but that’s not a fraudulent conveyance, since the plan not made to hinder, delay, or defraud a possible creditor and rather was done for insurance, retirement, estate planning purposes.
Still, it’s important that you start your plan sooner rather than later, especially if you own a business or are in a profession that’s more likely to be involved in a lawsuit, such as a doctor, engineer, or even an attorney. Even if you’re not wealthy, you can still be the target of a devastating lawsuit and in fact, lawsuits against those with modest assets can be even more devastating, since if you lose the little you have you may never recuperate from the lawsuit.
You can never be sure when disaster might strike, so the sooner you put your plan into motion, the better.
To learn more, or to speak with an attorney, please call us at (718) 942-4004.