Protecting a Business Owner’s Family

Posted on | June 14, 2009 | 1 Comment

A Question from one of Matt’s readers:

“Matt, should I buy some life insurance so my wife can pay off the bank loan I took out to buy my business?  I don’t want my wife to have to deal with the bank, if I die first.”

Matt’s Answer-

Probably, yes.  I’m glad to see my readers listening to my advice about the importance of insurance to business owners.

I’m not licensed to sell life insurance, but I am a big fan of insurance under the right circumstance.  Life insurance can be a great way to aid your widow to retire the business’ debt.  That would enable her to sell the business after your death and realize the full value of your company.  You might need some additional life insurance coverage to retire your home mortgage debt, car loans or other debt, and provide cash to support your family after they lose your income.

What about disability insurance?

You didn’t ask about disability insurance, but it might be even more important, given your circumstances.  You’re a young and physically active person.  And, your business is relatively small and cannot operate for long without you.  You’re more likely to suffer a disability in the next 20 to 30 years than to die.  So, I’d encourage you to discuss disability insurance with your agent.

Before you meet with your agent, please review this post-  Is Your Insurance Agent Reassuring.  In that post, teach you how to communicate with your agent in order to make the most of insurance purchase.

Remember this-  Your insurance agent is NOT YOUR agent.  Your agent actually represents the insurance company.  So, keep in mind that you always have the right to seek a second opinion from any professional advisor.  If you’re not comfortable with the advice you’re getting, seek a second opinion.  You might return to the original advisor, but you’ll have more information and possibly a higher level of faith and trust in the advice you’re getting.

Stay Out of Court At (Nearly) All Costs

Posted on | March 30, 2009 | No Comments

Stay out of court, because courts often make bad decisions that can have enormous impact on your business, your personal life and your finances.  If you stay out of court, you increase your chances of controlling your own fate.  If you let a judge decide, you have no control.

One of my law partners has a great expression about clients who get themselves entangled in lawsuits:

“When a client has to file a lawsuit or gets sued, he has already lost.”

What’s that mean?

It means lawsuits cost.  They cost you or your business:

• Time spent in the courtroom, in depositions, reading documents, talking to your lawyer, in mediation, reading court documents, searching for evidence, etc.
• Money for attorneys’ fees, expert witness fees, photocopies, travel, etc.
• Opportunities to make money elsewhere doing other things, to grow your business, or to take personal time to be with family and friends.
• Your health.  Lawsuits are stressful.  The only thing more stressful than getting sued is having to file a lawsuit.  Lawsuits are fun for lawyers.  I love them, from a professional vantage point.  I get to exhibit and sharpen my advocacy and strategy skills, but lawsuits are no fun for my clients.
• Goodwill or reputation.  Getting sued can hurt the image people have of your business or you.  The newspapers rarely report stories accurately.  Allegations and even rumors are often reported as facts.  People who really, truly know you and your ethos will be unaffected.  Everyone else,  including your customers, vendors and potential customers, will develop doubt in you to some degree.

A good lawyer-friend of mine just got a horrible ruling from a judge in a divorce case.  The judge was wrong and should be appealed, but at what cost to the client?  The judge robbed a father of all time with his children in a visitation ruling.  The father in the case is not a bad guy at all, but the judge, for whatever reason, decided that the man should no longer see his own children. 

Amazing isn’t it?  How can one human being exercise that much power over another human being.  This father is dying inside, because he no longer can see the children he loves so much.  It’s very sad, and that judge should be ashamed of himself.

In a divorce case, there is not much you can do in advance to avoid a divorce lawsuit.  Save your marriage, if you can.  Or, don’t marry THAT woman in the first place.  Ladies, don’t marry THAT man!  That is the only lawsuit prevention available in a divorce context.

But what about your business affairs?

Do you take these preventative measures:

• Meet with your lawyer when you are unsure of your rights?
• Meet with your CPA, lawyer and insurance agent at least once every year?
• Have your lawyer draft or review all your contracts?
• Have your lawyer develop an asset protection plan?
• Use limited liability entities properly to create a “corporate shield?”
• Train your staff on a regular basis?
• Have processes and procedures developed into an operations manual?
• Properly use insurance to transfer liability risks away from you or your business?
• Etc.

If you answered “no” to any of these questions, then it’s time to go see your lawyer.

WARNING- Asset Protection Is NOT Done Off-Shore

Posted on | March 16, 2009 | No Comments

My blog just got spammed by some company trying to get people to invest in a corporation based on some Caribbean island.  The spam came across as an advertisement for “asset protection.”  I deleted the comment and will not be posting it on this site!  The spammer was trying to comment to my post Asset Protection-  “It’s As Easy As 1 – 2 – 3!”

So, I need a Caribbean trust or corporation to protect my assets?

Hogwash!

Asset protection is the lawful use of entities, contracts, business practices and other legal structures that are recognized and permitted under existing law.  Everything you need to protect your personal and business assets can be found right in your home state.  You do not need to go off-shore to protect your assets.  In fact, going off-shore raises another type of risk to your assets and can, therefore, be self-defeating.

Asset protection is NOT trying to hide assets in a Caribbean-based trust or corporation.  Nor do you need a Delaware corporation or a Nevada corporation, unless you live or operate your business in those states.  Nor do you lawfully protect assets by trying to hide them, by committing crimes or by engaging into fraudulent transfers.

The law provides ways to protect your assets!  You’ve just got to understand what your risks are and what lawful means are available to address those risks.  It’s really not that difficult.  And there is no trickery involved.  Trickery usually leads to other problems.

Do you know what a “legal witch doctor” is?  It’s a term I coined years ago to describe people who talk about the law and who practice law without a license but with a particular financial motive impacting their advice.  If a legal witch doctor tells you that off-shore trusts are the key to asset protection, you can bet that off-shore trusts are being sold to you.

Buyer beware!  Avoid legal witch doctors.  Go see your lawyer.

LLC’s, Charging Orders & Judgment Liens

Posted on | February 17, 2009 | No Comments

Question from one of Matt’s readers-
“A residential rental property is owned by a single member LLC. The tenant files a frivolous lawsuit and wins. The amount of damage awarded to the tenant exceeds the amount covered by the liability insurance on the property. What are all the possible ramifications to the property, the single member LLC that owns the property in question or the natural person who is the single member of the LLC? Charging order, lose ownership of the property, lose ownership of other assets owned by the LLC, etc.?
Thanks Matt”

Matt’s Answer-

What a great question. There are several issues here. I’ll take them in chunks.

FRIVOLOUS LAWSUIT

I’m going to assume that your case was in a small claims court, even though you didn’t say that. Crazy things happen in Small Claims Courts. The level of “lawyering” and judging is often not as high as it is in superior and circuit courts. There are exceptions, of course. But, your case shows why we have appellate courts to fix what lower courts screwed up.
Appeal!
In Marion County, Indiana, appeals from the Small Claims Courts go to the Superior or Circuit Courts. In Marion County, you get a fresh start. . . a new trial. The Small Claims Court judgment is vacated. You start over and get a chance to get the case determination right. So, my first response is: Appeal! That’s an easy solution to all your problems.

INSURANCE

Secondly, ask your insurance agent why you’re not fully insured! Should you be suing your insurance agent for malpractice? Maybe the insurance agent’s Errors & Omissions coverage is your solution.
On a side note, I’d encourage you to learn how to communicate properly with insurance agents. There are specific things you should do in order to develop the right Insurance Plan for your business, and I can share those techniques with you in another article or during a consultation.

JUDGMENT LIENS

When a judgment is entered by a court of record in an Indiana county, a lien is automatically created against any real property owned in the same county. If the judgment-defendant has real property in other counties, those properties are not impacted. However, a judgment in “County A” can be “recorded” in “County B.” At that point, the judgment is a lien on real property owned by the judgment-defendant in both counties.
Importantly, judgment liens apply not only to the subject property but to ANY real property owned by the judgment-defendant.

PERSONAL LIABILITY

If I understand your facts, there is no judgment against the LLC owner, just the LLC. In that case, there should be no collection efforts against the LLC owner. A plaintiff cannot collect a judgment issued against an LLC from the assets of the LLC’s owner. So, the owner (you) should not be concerned about a charging order. Actually, charging orders are a good thing, in a sense (read on).
Some of you might be asking: “What’s a charging order?”
A charging order only applies to LLC’s, not corporations. A charging order is an order that requires the LLC to pay to the plaintiff any monies that would be distributed from the LLC to the owner. There must be a judgment against the owner, before a charging order could be issued. Charging orders are the only remedy a plaintiff would have to collect from the ownership interests a judgment-defendant would have in an LLC. So, in other words, a plaintiff cannot acquire an owner’s ownership interests in an LLC. By contrast, a plaintiff can acquire a judgment-defendant’s stock in a corporation.
Why do the courts distinguish between corporations and LLC’s in this area of the law?
The rationale is that LLC’s are partnerships and that a plaintiff should not be permitted to become someone’s partner. So, if A and B are partners in an LLC, and C gets a judgment against B, C should not be able to enforce the judgment to become A’s partner. A has the right to chose his partners. He picked B, not C, to form a partnership. C could get a charging order against the LLC and collect any monies that would be distributed from the LLC to B. If A and B owned a corporation together, then C could acquire B’s stock and become a co-owner with B.
Back to your situation. . . the law concerning charging orders is irrelevant to your situation for the reasons I described above. What you have at risk is your equity in the LLC. You cannot do much about the equity you have in the LLC at this point, now that the judgment was entered. Any transfers of equity you were to make now could be considered “fraudulent transfers.” And that is an entirely separate topic for another article.

THE LESSON(S) HERE-

Call your attorney. You lost a lawsuit, and probably did not have a good attorney with you in court! You saved the cost of having an attorney in court, but at what greater cost? Was it worth it?
Appeal bad decisions.
Learn how to communicate with your insurance agent to develop the right Insurance Plan.
Plan. Planning is an activity that occurs in advance. I’m not sure from your short question what your Asset Protection Plan includes. Clearly, planning is important, as your situation reveals.

Is your insurance agent reassuring?

Posted on | January 28, 2009 | 33 Comments

How do you know if your insurance agent sold you the right insurance coverage?

You’ll never know for sure, unless you suffer a casualty, loss or judgment.  Or, you can follow the instructions in this blog!

I am a huge proponent of getting insurance to cover your personal and business risks.  But, the key to insurance is getting the right type and the right amount of coverage.

Let me illustrate these lessons with the story of two of my clients:  Fred and Bill.

THE STORY OF FRED –  BUYING THE WRONG COVERAGE.  Fred ran his business out of a spare bedroom in his house.  Twice each week, Fred had a few contractors come to his home for business meetings.  One winter day, Fred’s favorite contractor (Stanley) walked up Fred’s driveway, slipped on some ice and broke several bones.  Stanley had no disability or health insurance, and was out of work for weeks.  Stanley, being self-employed and thus unemployed, turned to Fred:  “Hey Fred, I got hurt because you didn’t clear your driveway of ice.  Can you pay me my lost income, while I heal?”  Fred calls his insurance agent and makes a claim.

BUT THERE’S NO COVERAGE FOR FRED!  Fred’s homeowner’s insurance doesn’t cover business risks.  Stanley is a business invitee.  There’s no coverage for a business invitee who gets hurt doing business at Fred’s home.

THE STORY OF  BILL- BUYING TOO LITTLE COVERAGE.  Bill owns a business- a restaurant.  One day, there is a grease fire in the restaurant and Bill loses $225,000 of equipment and tools (stoves, ovens, utencils, pots, pans, etc.) and $150,000 of leashold improvements (plumbing, carpet, walls, restrooms, etc.).  Bill calls his agent and makes an insurance claim.

Then Bill gets the bad news-   Bill has $200,000 of coverage on equipment.  He’s short  $25,000 of coverage.  But the insurance agent has some good news. . .  there’s $300,000 of coverage on the improvements.

What?

What?!

What?!!!!

Bill was UNDER-insured on equipment and OVER-insured on improvements.  What a waste.

Could Fred and Bill have done something differently?  Was this the agents’ fault?  Do these situations happen often?

Yes.  Maybe.  And yes.

There are solutions.  There is a better way to communicate with your insurance agent in developing a great business insurance plan.  Stay tuned to this blog.  I’ll cover these topics in future blogs.  For now, you should recognize the importance of buying the right TYPE and AMOUNT of coverage.

CHECK OUT OTHER ARTICLES I’VE WRITTEN ON IMPORTANT BUSINESS, REAL ESTATE AND LAW-RELATED MATTERS:   http://indiana-attorneys.com/articles_news/index.htm