We talk a lot about protecting client assets through diversification and prudent investment strategies, as well as insurance of various kinds. That message resonates well with corporate employees. However, if you want to work with small businesses – a highly desirable demographic – it's important to realize that, while asset allocation and portfolio return are still a priority, asset protection also means insuring their businesses and personal property against suits or torts. Insurance is only one aspect of their asset protection plan. Their needs reach beyond that into choosing the proper corporate structure for the business and separating their often co-joined personal assets and liabilities from those of the business.

Part of figuring out how to best protect a given business owner involves identifying where risks are coming from. They can be internal risks from disgruntled employees or external risks from unhappy product vendors or dissatisfied customers. A comprehensive plan for dealing with these risks will vary from one owner to the next, but planners who want to tap more deeply into this market should be familiar with basic tools to do the job.

The very structure of the business is important. Different business structures – sole proprietorships, corporations and partnerships – expose owners to different levels of liability. Many companies understandably start out as sole proprietorships because they are easy to set up, but this structure leaves the owner fully liable for any legal action taken against the company. As the business grows, so do its liabilities, and owners may do well to form a corporation, which often provides the best combination of liability and flexibility depending on the situation.

Insurance Matters

The structure of the business is only part of the story. Business owners, like everyone else, need insurance, including life, disability and health coverage. Every financial planner who works with small-business owners should also be familiar with key-person, errors and omissions, extended liability, professional and product liability insurance. Planners may be able to help lower costs by researching any trade or other business organizations the business owner belongs to that may offer group rates.

In addition to insurance, though, there are certain exemptions that protect the personal assets of business owners against potential creditors of the company. The kinds of assets that are exempt vary from state to state, and in some states, federal instead of local exemptions may apply.

For example, most states have a homestead exemption that allows a business owner to keep his home even if the company fails. So a personal residence should never be transferred to a corporation. In some states, this exemption is limited to a certain amount; any exemption left over after protecting the home can be applied to any property. In some states, such as Florida and Texas, the homestead exemption may be unlimited depending on how long the home has been owned, while Delaware, New Jersey and Pennsylvania, for example, provide no specific homestead exemption. In these states, presumably, federal laws would apply.

Other assets that qualify for exemption include pension and retirement benefits needed for support, life insurance, a percentage of wages, personal property such as animals, crops, clothing, appliances, books, household goods, jewelry, cars, personal injury recoveries, Social Security, unemployment benefits and, in some states, annuities that are paying out.


If the potential liability goes beyond the business owner's insurance, you might want to consider an asset protection trust (APT). Prior to the turn of the century, most of these trusts were established offshore in the Bahamas or Cook Islands, and in the last decade, more than $1 billion has flowed overseas into APTs. An advantage of the offshore trusts is that, unlike most trusts domiciled in the U.S., the settler could retain full control over the assets and still enjoy creditor protection. But in mid-1997, Alaska and Delaware created a type of trust that allows the use of the spendthrift trust, which lets grantors who set up such trusts have full creditor protection for and control of the assets in the trust, but not distributed from the trust. Incidentally, these states at the same time turned over the rule against perpetuity, allowing families to hold assets in trust for future generations indefinitely.

APTs don't apply to all situations, and the other protections should probably be considered first. Advisers to small business owners should look for an appropriate business structure, understand the different levels of protection each affords, then look at creditor exemptions and insurance. APTs also apply when a client’s potential liability goes beyond the insurance he or she already has. For example, a Florida doctor who felt she couldn't afford the malpractice insurance premiums in her state might put the assets of her practice in an asset protection trust.

Tangible or physical assets are not the only type of business assets that require protection. It's also important to protect the intellectual property of a business. This can be accomplished with patents, trademarks, service marks and copyrights.

Of course, not every business owner needs every form of asset protection. But every business owner does need an asset protection strategy. In all these strategies, the individual needs to complete a questionnaire that notes how properties are titled, and to use attorneys and accountants to come up with the right level of exposure and a strategy for protection.