Estate planning and asset protection go hand in hand. After all, your estate plan will be of little value if you have no assets left to distribute.

Most people concentrate their asset-protection efforts on insulating their personal wealth from frivolous lawsuits or other claims. But if a significant portion of your wealth is invested in a business, it’s equally important to protect its assets from unreasonable or excessive creditor claims.

Business Asset-Protection Strategies

Most asset-protection strategies for businesses involve putting up walls between a company and its assets. If the majority of your assets are tied up in a business, consider these strategies:

Distribute the wealth. A simple, yet effective, technique for protecting personal assets is to give them away to your children or other family members. A creditor can’t go after assets you don’t own. Similarly, your business can protect its assets by distributing accumulated earnings to the owners. So long as you retain a reasonable amount of working capital in the business, this strategy allows you to shield excess funds against business creditors. (This assumes that the business is conducted within an entity that allows one’s personal assets to be protected from the business liabilities.)

Divide the pie. One of the best strategies for protecting business assets is to divide the business into separate entities. If certain business activities are riskier than others, consider forming separate entities to conduct these activities. Doing so allows you to limit the liability risk associated with them. Provided the entities are structured and operated properly, you can prevent creditors from going after assets owned by other entities within the group, even if they have common ownership.

Weigh renting vs. buying. Another way to protect valuable business assets is to sell them (usually to another entity created by the company’s owners) and then lease them back. If done right, these assets no longer belong to your company, so they’re beyond the reach of the company’s creditors.

Strip it down. Equity stripping involves pledging company assets as collateral for a loan. The company then loans the funds to its owners, who protect the loan proceeds with their own personal, asset-protection arrangements. This strategy strips the company of equity, leaving less wealth exposed to creditor claims.

Finally, it’s important to ensure that the company is left with sufficient funds to meet its future operating needs. If a court finds that the company is grossly undercapitalized, these walls may quickly tumble down.

Complex Tax and Legal Issues

There are a variety of strategies you can use to protect your business assets and preserve your wealth for your heirs. Whichever ones you choose, start planning as early as possible (ideally, at the time the company is formed). You can’t transfer assets with the intent to defraud creditors, so it’s important to have asset-protection strategies in place well before any claims arise.

Bear in mind that many of these strategies involve complex tax and legal issues, so be sure to consult your advisors before attempting to implement them.

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