There are times when business owners should leverage their companies. Depending on their economic circumstances situation, part of the decision to take on debt may entail making sure their assets are insulated from unfounded and groundless lawsuits. By using bright-line asset protection planning strategies, business owners can benefit in multiple ways by using leverage.
An advanced planning strategy often used by successful business and real estate owners to protect their assets from unjust and frivolous lawsuits is to use bank loans to strip out the equity. “Conceptually, it’s a very simple process,” explains Evan Jehle, partner at FFO Business Management & Family Office. “The business owner takes out a loan from a bank and secures the loan with the asset whether its equipment or real estate property. This way, the bank, has preference over judgments obtained by creditors. For creditors to get to the encumbered assets, they would first have to pay off the bank loan.”
According to Frank Seneco, President of Seneco & Associates, an advanced planning boutique, “By using the assets of the company to secure a loan drains the value of those assets. This essentially puts the assets beyond the reach of predatory litigants. The choice of what assets to encumber is an important decision. While taking the loan has to make economic sense, from the perspective of asset protection planning, exempt assets such as retirement accounts should not be used as they are already protected. Significant accounts receivables or expensive equipment that cannot be assigned or otherwise titled are likely to be good choices for equity stripping. The bank will want a first secured position on a company’s receivables and equipment as they are the most liquid and valuable assets.”
Equity stripping can certainly work for some business owners. However, when approached and implemented less than expertly, there are going to be serious problems. According to Carlo A. Scissura, CEO and President of the Brooklyn Chamber of Commerce and author of Maximizing Personal Wealth: An Advanced Planning Primer for Successful Business Owners, “Whenever a business owner is looking to use any advanced planning strategy, the most important decision is who to engage. It’s essential that they work with technically proficient, ethically centered professionals.”
This article first appeared on Forbes.com Written by Russ Alan Prince on Sept 29, 2015