Protecting Personal Assets; It's Vital to Safeguard Personal Property before Problems Occur
Professionals who practice in partnerships face special risks because they can face liability for potential claims against their partners. In larger practices, a professional may be vulnerable to claims against his or her personal assets resulting from engagements performed in distant cities of which he or she had no knowledge. Even those who practice in professional corporations can be hit with personal malpractice suits. Failure to adopt a plan that protects assets from creditors can have tragic consequences for professionals who are sued. Personal liability is increasingly troubling for CPAs in particular because of the trend that targets CPA firms as the deep pocket for investors and federal regulators. The magnitude of the potential liability cannot be overestimated. At the same time, however, insurance premiums for accountants are so high that some CPAs are risking practicing without insurance. CPAs, however, are not the only ones who must worry about personal liability. Many of their clients also face possible malpractice litigation or liability for their partners' actions. CPAs are uniquely suited to prepare and analyze their own balance sheets and those of their clients when considering asset protection. They should remember, however, the strategies described here don't apply to all situations and should be used as a starting point for discussions with legal advisers. This article discusses how professionals can use funded revocable living trusts and family limited partnerships to protect assets. Some of the discussion is based on Virginia law, but the concepts generally apply elsewhere. Although the article discusses income tax and estate planning ramifications, its primary focus is protecting assets from creditors other than the Internal Revenue Service using strategies that also can play a critical role in income tax and estate planning considerations. USING TRUSTS TO PROTECT ASSETS For married couples, forming two funded revocable living trusts is a good way to protect assets of the more vulnerable spouse from claims. Assume one spouse is a law firm partner and is worried about a future malpractice claim, and the other is in a profession less subject to legal liability. It may be appropriate to create one funded revocable living trust for the law firm partner and another one of these trusts for the less vulnerable spouse. Statutes in several states now provide that each spouse is entitled to hold his or her own property. Virginia's provision says the wife's property is not subject to the husband's debts or liabilities (assuming the property was not transferred to the wife as a fraudulent conveyance, which will be discussed below). Further, transfer of assets to an express, written trust controlled by the wife rather than to the wife outright makes it less likely a court would nullify the conveyance if challenged by a creditor (again, assuming no fraudulent conveyance). One reason for this conclusion is, as discussed below, there can be significant estate planning advantages to using a funded living trust. Thus, there are good reasons besides asset protection for adopting this type of plan. The couple begins by taking an inventory of all their assets. The more valuable ones, such as homes and investments, are transferred to the trust of the spouse less vulnerable to litigation. (As a precaution, this spouse should purchase an umbrella insurance policy.) Other assets, such as the couple's cars, are transferred into the lawyer's trust. The assets are transferred to the trust by listing them on a specially drafted schedule A accompanying the trust agreement and deeding them to the trust. To be included, newly acquired assets must be added to the schedule. Each spouse is the creator (that is, the grantor or settlor), initial beneficiary and trustee of his or her trust. Each trust can be amended or revoked at any time if, for example, financial planning goals change and asset protection becomes less important because the professional spouse retires or otherwise becomes less susceptible to judgment. …