The power of asset protection

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One of the roundtables at the recent Truckload Carriers Association annual meeting in Orlando centered on asset protection. The session was well attended – and I’m sure it wasn’t because I was one of the presenters. The fact is, some asset protection strategies are quite attractive because they protect your assets and your company’s holdings while reducing your costs and saving you money in taxes.

Asset protection refers to efforts to structure the legal form of business so that company assets – or the personal assets of the company owners – are afforded increased protection from potential creditors in an inherently risky business. We live in a litigious society, and trucking companies make easy targets for plaintiff’s attorneys. Jury trials in numerous states have yielded unbelievable verdicts that could wipe out whole companies and the personal wealth of the owners.

In response, insurance costs have spiraled upward in recent years. This has brought a renewed focus on asset protection strategies, of which at least two are emerging for increased use by fleet owners and allied industries.

Entity planning
Increasingly, savvy fleet owners are setting up multiple LLCs or corporations to hold various parts of their businesses, separating the risks, and managing the insurance costs in the riskiest entities. The resulting legal protection can build legal hurdles that frustrate plaintiff’s attorneys and would-be creditors in lawsuits. This practice is common throughout corporate America, but it is finally catching on in trucking.

Generally, one LLC would hold title to the equipment and take on the debt related to it. Another would hold the operating authority, rights to operate the equipment and would deal with customers, holding the accounts receivable financed by lines of credit. This one would pay lease payments to the holding company. Should the overall business have considerable investments or cash accumulated, a third LLC would be set up to be the “cash company” that might loan funds to the other two.

In trucking, more risk is generally in the operating company than in others in such an arrangement. Should an accident and a resulting trial verdict cause this one entity to go bankrupt, then potentially, the other companies’ assets would be protected. You could then attempt to set up another operating company.

Complex? You bet. But the benefits may go beyond asset protection. Some fleets have reported hundreds of thousands of dollars in annual insurance cost savings. Yes, there is complexity to the accounting, legal structure and requirements to be met, but the annual savings in insurance costs – and owners’ peace of mind – probably are worth the effort.

Welfare benefit trusts
An even more sophisticated and promising tool is the welfare benefit trust, which larger companies should consider. WBTs allow companies to set up special benefit plans and place company assets in these plans for the benefit of key employees and the employers. Once there, these assets are protected from many creditors. But beware. State laws vary, so be certain this is permitted in your state.

A WBT can carry incredible tax benefits. It can help company owners provide benefits to key employees and company owners, that otherwise might be limited in tax deductibility or not deductible at all. A WBT might not be subject to retirement plan contribution caps either.

Life insurance, for example, is not ordinarily tax deductible. But it can be deductible inside a WBT, if structured properly. And the death benefit can still be tax free to the beneficiary’s family.

These asset protection strategies are not for the faint-hearted or for amateurs to implement. They contain calculated risks and diligent requirements. In addition, careful and experienced tax, accounting, legal and professional documentation and assistance is an absolute necessity. But don’t let these hurdles discourage you from pursuing these win-win possibilities.

“Using Holding and Operating Companies,”an online article by CCH Business Owners’ Toolkit .

“How a Welfare Benefit Trust Can Reduce Your Company’s Costs,” by Charles Epstein, CLU, ChFC, online article of the UMASS Family Business Center.