Succession Planning for Investments
Whether you plan to actively manage your investment properties or use a third-party manager, you will remain the key decision maker. All commercial real estate investors will eventually retire and enjoy the residual, passive income. It is important to put a succession plan in place, a strategy which implements a trustworthy decision maker in your place, operations personnel, and a validator. A validator is third party oversight to your succession plan, to ensure that your desires are implemented. Also known as the “exit strategy” the succession plan must be implemented at the beginning as a fundamental element of your commercial investing.
Asset Protection for Your Assets
Many investment properties, including multi-family, hospitality, retail and manufacturing, are sued regularly, and sometimes the individual owners are named in the lawsuit. Sophisticated investor owners are acutely aware that their assets are vulnerable to litigation. In response, all business owners and high net worth individuals must take the offensive and shelter their assets through asset protection. The ultimate objective of asset protection is to ethically keep assets from creditors legally, without concealing them illegally or evading taxes.
Asset protection takes many forms, including entity formation, appropriate levels of insurance to cover liability and strong contractual provisions to shift liability or limit liability. Other situations warranting review include familial relationships such family business or marriage, if you have a successful business or considerable assets you will want to consider is a prenuptial agreement. One common vehicle to shelter assets is to form special trusts, the legal title to the asset is transferred to the trust, which means that business and individual’s creditors cannot access the assets, while the creator of the trust remains in control of the day to day operations of the business and assets.
The first step is to consider the type and classification of assets which are shielded from creditors automatically, such as retirement plans, insurance and homesteaded properties. Then the remaining assets, which are not automatically shielded from creditors, are considered. The type of assets which need to be protected by asset protection, include: cash, excess equity in home, investments in stock, investments in coin, investment properties, businesses, business assets, and personal property such as cars, collectibles, furniture.
The second step is to evaluate the risk of loss. This area can be complicated and involves multiple issues, such as the type of business operation and risk of lawsuits. Another consideration is the identity of the creditor. For example, government agencies, especially the IRS, are treated differently than other creditors. Once the risk of loss has been identified, then the business owner and high net worth individual may mitigate the risk through asset protection.
The third step is to identify the correct protection for your risks, for example, every business can enjoy the protection and benefits of an entity, such as a corporation or limited liability company, to shelter the owner from liability.
One thing to keep in mind is that asset protection is not the same as the limitation of liability. Liability limitation stops civil suits from being filed in the first place. Asset protection is to keep judgments from taking assets after these suits have been filed. Even so, be aware that these two areas of legal practice do intersect at times. Like many preventative planning tools, asset protection is generally not available after the lawsuit has been filed or liability underlying a lawsuit (such as death or injury to another at your business) has occurred, in fact a transfer after these events will most likely constitute a fraudulent conveyance and be void and revered by a Court.
Although daunting, the asset protection plan will pay off in spades if you are ever sued and will give you peace of mind about the foundation of your continued business operations and preservation of your assets. In order to effectuate an iron clad asset protection plan, the plan must be developed and documented prior to a catastrophic event or other triggering event, so do not put it off. In order to achieve the best plan you must include all relevant advisors in the preparation, documentation and execution of the plan, such as your attorney, accountant, insurance agent and financial planner, and you should review the plan annually or upon any significant event.
Estate Planning for Your Assets
As the adage goes: three events are inevitable in every lifetime, birth, taxes and death. It is imperative that you plan for the inevitable event of your passing. At this stage you consider who will benefit from your hard earned investments, assets and businesses after you are gone, all the while enjoying the benefits of your wealth to the fullest while you are alive. A well thought out Estate Plan will unsure that you continue to enjoy your wealth during your life, and that it will be managed and passed to your designated beneficiaries following your death. At this point you are ensuring your legacy and passing forward your resources to the next generation and the community. The Estate Plan will also allow you to designate a charity or non-profit to receive distribution on your passing, so that you can pass it forward and continue to make a difference even after you are gone! Other reasons to implement an Estate Plan are to avoid the cost and delay of Probate Court proceedings and to avoid federal and state death taxes, where applicable.