California has the dubious distinction of being one of the most litigious states based upon how may lawsuits are filed in California – especially against businesses – compared to other states. Construction company owners are at risk of falling victim to asset-hungry creditors, predatory lawsuits, and a lack of protection under California law. A wealth preservation strategy, commonly referred to as asset protection, customized to suit your specific personal and professional needs, is essential when operating in a high-risk industry.
The Importance of Asset Protection in the Construction Industry
The construction industry is rife with litigation risks. The breadth of threats to your business and personal wealth within the construction industry is enormous. The sheer number of potential parties who have grounds to file a construction lawsuit is enough to give any potential defendant nightmares.
Construction lawsuits can grow to include dozens of litigants. The parties may then become engaged in cross suits, further complicating litigation. Such litigation poses a risk to the future of your business. Without an adequate wall of protection, your operating capital, business assets, and personal wealth are all exposed to undue risk. If you could take action to protect your assets now, why would you choose to wait and leave yourself vulnerable?
Construction defect claims are one of the most significant litigation risks faced by construction companies today. However, construction companies also face the potential threats of contractual issues, employment issues, OSHA compliance, costly delays, not to mention the daily dangerous activities that go along with building and finishing any project. The result, in short, is you’re left with a substantial threat that is predictable and persistent.
At Sollertis, we work to identify all threats to your wealth and seek to minimize any potential claims before they ever arise. But if and when issues do arise, our clients find themselves prepared to weather the legal storm knowing they have a plan in place to protect against those claims. Our systematic approach will help protect your areas of vulnerability. Minimizing your exposure and reducing your risk profile is the best foundation for a solid asset protection plan.
You have worked hard to build your company and your reputation. You may complete many jobs at a great scale with decent profits and have no issues for years, growing your company and your personal wealth as you do. But, if you leave your wealth unprotected by failing to build an adequate wall of protection around your business, personal assets, and family wealth, you risk the reality of just one lawsuit wiping you out and resulting in catastrophic losses. The only wall worth building, is your asset protection wall.
Building a Wall to Protect Your Assets
Your construction company is likely the most significant source of risk exposure to your wealth. Following laws and regulations to the letter is challenging for all business owners, especially contractors, and this leaves a wide opening for future business creditors to come after you personally.
You likely took profits from your business and invested outside your construction company in an array of different assets:
- A personal residence
- Investment properties
- Retirement savings
- Investments into other businesses
Your investment assets are at risk of being subject to judgments by any of your creditors or other predatory individuals if you haven’t adequately protected your assets legally. Sollertis is an asset protection law firm, helping clients build a wall of protection around their wealth using various legal tools and mechanisms such as asset protection trusts, private retirement plans, and a host of other legal maneuvers. We work to help you protect your assets from the inherent risks associated with owning and operating a construction company.
Asset protection only works when it is in place before the claim. Otherwise, it’s too late.
A Master Asset Protection Plan (MAPP) created by Sollertis will serve as your customized blueprint to meet your goals and objectives for the protection of your wealth while still allowing it to grow. Traditional asset protection plans are static, tying up capital and assets that could be put to work, but a MAPP serves as a dynamic plan which adapts to changes in circumstances in your business, personal life, and even in the law.
Private Retirement Plans
Creating a Private Retirement Plan affords exemption from judgments and bankruptcy, providing a unique and flexible tool for wealth protection. California provides for a total exemption regardless of the IRS qualification. Private Retirement Plans are exempt per CCP § 704.115, with the exception of judgments or orders for any:
- Child Support
- Family Support
- Spousal Support
By specifying certain assets as “retirement assets,” a private retirement plan allows you to build a legal wall around those assets, protecting the funds you plan to use during retirement.
Private Retirement Plan Advantages
The flexibility in design afforded under California law allows you to make unlimited contributions without the need to cover employees with the same plan.
The assets in the private retirement plan are protected from lawsuits and other judgments, including bankruptcy, offering participants comprehensive protection for their retirement savings.
Further, the exemption applies to distributions from the plan, meaning assets are protected in the plan and when amounts are withdrawn.
Private Retirement Plans also afford you the flexibility to use them alone or in addition to existing qualified plans.
Business owners will also reap substantial tax savings from private retirement plans that include a tax mitigation strategy.
Private Retirement Plan Disadvantages
While Private Retirement Plans are an excellent asset protection tool, a recent case from the California Court of Appeals clarifies that the protection only extends as far as assets intended for retirement purposes. In the matter of O’Brien v. AMBS Diagnostics, LLC, the California Court of Appeals determined that funds are only protected when intended for retirement purposes.
The funds are protected as long as they remain in the fund. Once withdrawn, they remain protected as long as they are not co-mingled with other funds. An asset protection attorney should help you decide how to handle your retirement plans and any distributions to ensure the funds remain protected after withdrawal.
The private retirement plan is a complex structure that must include well-crafted:
- Plan documents
- A trustee to hold the funds in strict accordance with the plan documents
- A schedule of payments into the plan
- A schedule or formula for distribution upon retirement
Once the money is in your private retirement plan, it can be invested and put to work. However, that investment cannot be returned to you the business owner before retirement without risking the protection veil afforded by the retirement plan.
Other Retirement Assets Exempt from Creditors and Judgments
Retirement plans are commonly used as one asset protection method for California residents. Although California is not a friendly state in terms of asset protection legislation, certain retirement assets can be protected from creditors and judgments when setup in advance of any issues.
The Employee Retirement Income Security Act of 1974 (ERISA) states that qualified retirement plans must have an anti-alienation provision that excludes qualified retirement plans from bankruptcy. ERISA’s protected plans include defined contribution plans, 401K plans, and pension plans.
Yet, these protections do not extend to employers, so you have said protections for previous retirement plans, but not as the owner of your business.
As mentioned above, California law establishes that private retirement plans are protected from creditors, both before and after distribution. These plans include:
- Profit-sharing plans
- Self-employment plans
IRAs offer the least amount of protection. If a judge determines that the debtor can support themselves during retirement without using the IRA, it can be seized. The determination of a debtor’s ability to support themselves without the IRA is subjective, often leaving the safety of an IRA up to the discretion of the ruling judge.
Domestic Asset Protection Trusts (DAPT) and Offshore Options
Given California’s often unfavorable laws for asset protection, moving assets out of state or offshore is often a practical decision. Various states offer the ability to form a domestic asset protection trust (DAPT), but not all states offer the same level of protection or flexibility under their laws. A DAPT is an irrevocable trust where the Grantor is also named a Beneficiary, allowing them to access the funds held in the trust.
While DAPTs can be a valuable tool in certain circumstances, they remain subject to narrowly defined creditors, such as:
- Child Support
- Spousal Support
- Government agencies involved in taxation
Offshore asset protection can be used to remove your asset portfolio from the reach of the U.S. legal system. With the help of a skilled asset protection attorney, you may choose to place your assets into trusts governed by legal systems around the globe that provide a more robust set of asset protection laws. When going offshore, there are various foreign jurisdictions with varying laws.
In choosing offshore asset protection, you remain in control of your assets. The process usually starts with establishing an offshore LLC, then an offshore trust, and designating a Trustee. Some advantages include:
- An offshore trustee is not subject to the jurisdiction of US courts.
- A short statute of limitations that prevents creditors from launching prolonged attempts to retrieve your assets.
- You remain in control of the day-to-day activities as the manager of the offshore LLC
- Outside courts lack jurisdiction over offshore trustees. As a result, outside courts lack the authority to enforce the seizure of the trust’s assets.
- An offshore haven offers privacy for your wealth. Strict confidentiality laws that are not easily breached help business owners keep wealth and business ownership information private.
Protect Your Legacy
The last two years have seen a slate of new legislation that has impacted estate taxes and reduced the amount an individual can gift before the accrual of estate taxes. Numerous complex estate planning strategies, once used to pass down generational wealth, are being phased out. The bottom line is – it’s no longer easy to ensure that your wealth is passed on to those you choose without a substantial tax liability.
Tax law, and especially gift taxes, are under heavy scrutiny right now. As a California business owner, you need to make sure that you have a well-protected estate in place for your heirs, and that your estate is comfortably secured behind a wall of protection. The Slide Trust and the Bridge Trust are two tools we regularly recommend and implement for our clients to ensure their assets are as protected as possible.
The asset protection attorneys at Sollertis are committed to establishing protection that is customized for the unique needs of each client. Our clients often come to us requiring a range of legal and financial tools to protect their assets, in addition to the safeguards they think they have in place already. Drawing on the diverse experience of our attorneys and team, we closely work with clients to create an asset protection plan which focuses on wealth preservation, growth, and future flexibility. Reach out to our firm today and find out how we can better protect you from whatever threats come your way.