Will You Be “Singing In The Rain”?

BARBARA L. YONG

Partner

The future is impossible to predict and your assets should be protected in case of a rainy day.

To be truly prepared, we should hope for the best, but plan for the worst.

HOW BUSINESS OWNERS CAN PROTECT AGAINST PERSONAL LIABILITY
Will You Be “Singing In The Rain”?

You have worked hard to build up a nice little nest egg. You may have started or purchased a successful business, own a home, have savings in the bank, put aside money to pay for your kids’ college education, and accumulated several investments which you hope will carry you though retirement. The stock market is at an all-time high, and you may have even been diligent enough to prepare an estate plan. But the future is impossible to predict and your assets should be protected in case of a rainy day.

You can be held personally liable for certain types of business debts.
If your business should one day find itself struggling, fall behind in taxes, or lose a lawsuit, you could find yourself personally liable for some or all of your business’ debts. As the owner of a business, you need to be aware of the potential liability you face notwithstanding the protection afforded by the “corporate veil.” It is after all, just a thin veil, and not a brick wall. Some of the types of debts for which you could be personally obligated include:

  • Personally-guaranteed loans and leases,
  • Unpaid sales tax,
  • Unpaid employee withholding tax (the trust fund portion),
  • Unpaid wage claims (including attorney’s fees),
  • Unpaid Unemployment Insurance,
  • Unfunded or under-funded Pension liabilities, and
  • Employment discrimination, sexual harassment, and retaliation claims.

How can you protect your personal assets?
Right now, before the next market correction or your business falls on hard times, is the perfect time to ask your legal advisor whether you have done everything you can to protect your personal assets from creditors. And here are just a few of the ways you can protect what you have worked so hard to build.

A. Real Property.
In Illinois, spouses can hold title to their residence in Tenancy by the Entirety. By doing so, your home can never be taken to satisfy a debt owed by just one spouse. A judgment creditor can record a lien against your home which may eventually be paid when your home is sold, but they cannot force you out of your home. If you don’t know how your residence is titled, you should check your deed or ask your attorney to check with the County Recorder’s Office.

B. Retirement Accounts.
Cash, investment accounts, and bank accounts are not protected from creditors. But individual retirement accounts (IRAs) up to $1,000,000, qualified retirement plans including 401(k) accounts and pension plans, as well as social security are exempt from most creditors. The only exception is the Internal Revenue Service. So it is critical that you maximize the amount you deposit into these retirement vehicles throughout your working life. And in the event of a rainy day, these should be some of the last dollars you use.

C. 529 Educational Savings Plans.
Funds held in a 529 Plan grow on a tax deferred basis. Equally important, from an asset protection standpoint, these funds are similarly exempt from creditors. While the purpose of the 529 Plan is limited to funding the cost of education, you can switch the beneficiary from among your children and grandchildren. The only limitation to 529 Plans being creditor proof is that the plan needs to have been established more than a year before the creditors come a-calling.

D. Life Insurance.
Term life insurance has no cash value and the death benefit is only payable upon the death of the insured. However, whole life and universal life insurance policies both have a cash value, which can either be drawn against or borrowed. Several insurance companies are now offering long-term care products that have a whole life cash component. In Illinois, life insurance policies are also beyond the reach of creditors provided the beneficiary of the life insurance policy is a spouse or a dependent.

Better safe than sorry.
In conclusion, most business owners are optimists and only plan for the good times. But as they say, to be truly prepared, we should hope for the best, but plan for the worst. It is important that you consult with your investment advisor, estate planning attorney, and insurance agent to protect your hard-earned savings before the storm clouds appear on the horizon.