The Dow Jones industrial average fell 324 points last Friday, its second worst slide of the year.  The drop pushed the stock market back into a "correction" — meaning a decline of at least 10% from its recent high.

While I remain optimistic about the economic future of our country, we obviously face great challenges in the coming years.  Stock market volatility is here to stay.  General economic conditions remain uncertain; and competition from abroad will be a constant challenge.  So it remains critical to examine your assets from time to time (business and personal) and consider how well they are protected from creditors.

If you are a resident of Florida and own a home in Florida, and most of your assets are in IRA’s and qualified plans, you have little to be worried about from an asset protection standpoint.  On the other hand, if you live in Northeast Ohio and a significant portion of your assets are invested in a family business, it is vitally important that you consider how well your assets are protected from creditors.

Many people focus on asset protection after some economic disaster strikes them.  By that time it is often too late.  The time to focus on protecting your assets is now — before you have any creditor problems.

The "Internal Affairs Doctrine" means that the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation.  For example, if there is a dispute between two shareholders of a Delaware corporation, it would typically be decided using Delaware law, even if the company operates in another state.  This means that the state in which you form a corporation or a limited liability company can be important.

A recent decision by the Court of Common Pleas of Franklin County Ohio affirms this doctrine.  The Court held that the law of Delaware (where the corporation was incorporated) rather than the law of Ohio (where the case arose) applied to a dispute involving corporate directors.

While many state corporation and LLC statutes are similar, they are not all the same.  Frequently it is fine to form a new entity in the state where it will be operated.  In some circumstances, however, it is advisable to form the new entity in another state.

So whenever an entity is formed for asset protection purposes, one factor to be considered is whether to form the entity in one state rather than another.

Family limited liability companies can be a convenient vehicle to hold and administer family investments.  They offer significant benefits from both an estate planning and asset protection standpoint.  Until recently, the entity of choice for family investments was a family limited partnership (often just called an FLP).  While there is nothing wrong with an FLP, we are now using LLC’s more frequently.  There are some technical legal differences between the two forms of entity, but the benefits are basically the same.

Holding family investments (such as marketable securities and real estate) in a family LLC makes it significantly more difficult for a creditor to reach those assets than if they were held individually.  Keep in mind that not only you, but also your children and other family members could potentially have future creditor problems.  So an LLC can help protect the interests of all family members.

A family LLC can also be a useful vehicle for estate planning purposes.  Rather than making outright gifts to children, you can gift interests in the family LLC.  You may be able to take advantage of some discounts for gift and estate planning purposes.

The bottom line is that a family LLC can be a useful tool for both asset protection and estate planning purposes.

Poor (or no) estate planning can lead to catastrophic losses of family assets.

Check out the article by Claudia Buck in The Portland Press Herald with some sad stories of families who wasted lots of money due to poor estate planning.  Some simple steps can avoid family fights and save legal fees.  These include earmarking personal property; carefully choosing your executor and trustees; and carefully thinking through the provisions of any trust agreements.  This particular article does not discuss federal and state death taxes, which are another important consideration.  Failing to take these taxes into account in connection with an estate plan can result in staggering losses for many families.

Having basic estate planning documents in place will not provide a complete asset protection plan.  Estate planning is, however, one of the important components of an overall plan to protect your assets.

UBS (the giant Swiss financial institution) has received a lot of bad press recently in connection with offshore tax evasion schemes.  More UBS clients were indicted earlier this month, but federal authorities are focusing on other financial institutions as well.  Lynnley Browning reported last week in the New York Times that arrests have now been made in connection with an international tax evasion scheme said to involve HSBC.

The latest case involves real estate developers who sold a hotel in New York City and allegedly routed the proceeds through sham accounts in Panama, the Virgin Islands, Liechtenstein, Switzerland and the Bahamas to evade taxes.  The complaint against the real estate developers (filed in federal court in Fort Lauderdale, Florida) describes how federal agents used wire taps in 2007 to record various phone conversations.  This shows that authorities are using more aggressive techniques in fighting offshore schemes.

I was setting up companies in Panama for clients more than thirty years ago.  These entities, however, were used for very legitimate business, tax, and asset protection purposes.  Using offshore companies or trusts to unlawfully evade U.S. taxes or for other unlawful purposes is becoming more and more difficult — as it should be.

It is now well settled that a limited liability company insulates the owners from the debts of the company.

It is nevertheless reassuring when a court re-affirms basic LLC protections.  In Dover Phila Heating v. SJS Restaurants 185 Ohio App.3d 107, 2009-Ohio-6187, the Ohio Court of Appeals for the Fifth Appellate District confirmed once again that members of a limited liability company generally have no responsibility for the debts of the entity.  The case was decided in late 2009 and published in the April 5, 2010 Ohio State Bar Association Report.  Citing another Ohio case, Slimans Printing Inc. v. Velo Internatl., Stark App. No. 2004CA00095, 2005-Ohio-173, 2005 WL 100963, ¶ 13, the court noted that pursuant to Ohio Revised Code §1705.48(B),

Neither the members of the limited liability company nor any managers of the limited liability company are personally liable to satisfy any judgment, decree, or order of a court for, or are personally liable to satisfy in any other manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of the limited liability company.

While there is nothing surprising in this recent decision, it is always good to see a court re-affirming the basic protections of a limited liability company.

A new law signed by President Obama last month makes it much harder for U.S. citizens to evade taxes by hiding money in offshore accounts.  Foreign financial institutions will now face a 30% tax on their U.S. investments if they refuse to provide information about accounts held by U.S. citizens.

None of this is a surprise.  With huge budgets deficits, Congress is closing offshore tax loopholes and making it harder for U.S. citizens to shelter money in foreign jurisdictions.  You can read about the new law in the March 28, 2010 New York Times article by Gretchen Morgenson titled "Death of a Loophole, and Swiss Banks Will Mourn".

As I have mentioned many times before… This does not mean there is anything inherently wrong with offshore trusts– as long as they are not used for unlawful tax evasion.

Just in case you need another reminder to develop your own personal asset protection plan…

More than half the states have tried to place caps on jury awards in malpractice cases.  But the caps have been struck down by courts in several states.  On Monday, the Georgia Supreme Court (in a seven-zero decision) struck down a 2005 state law that capped jury awards at $350,000 for the pain and suffering of a malpractice victim.  The court ruled that the state could not impose such a limit on the jury.  Some states seem to be accepting limits and others are not.  There does not seem to be a clear national trend at this point in time.  You can read more about this recent court decision in either the New York Times or the Augusta Chronicle.

The Georgia Supreme Court decision is another reminder that physicians should not simply wait for state legislators or the courts to protect them from liability claims.  Malpractice insurance is of course essential, but you should not stop there.  There are laws that allow you to protect assets — and you should take advantage of them to the greatest extent possible.  From simple steps like maximizing contributions to qualified retirement plans to more sophisticated planning with family limited liability companies, there are a variety of asset protection strategies worth considering.  But do not wait for state legislators, the courts or anyone else to help you.  Instead, focus on your own personal asset protection plan.

In a post last month, I emphasized that a business can be lost or severely damaged by lack of a meaningful succession plan.  The title of an article in yesterday’s New York Times says it all — "Lack of Succession Plan Puts Family Venture at Risk".  The article has some useful suggestions for closely held business owners, and it outlines some of the items that should be addressed in a succession plan.

In a February post I noted that business succession planning should be a team effort.  Some matters require business expertise; but many issues require sophisticated legal planning.  For example, the New York Times article mentioned some fifth generation family owners in Columbus, Ohio who prepared a fifteen year plan to pass on the company to the next generation, using a mix of grantor retained annuity trusts and family limited partnerships.  These vehicles can lower tax liabilities as well as provide a legal framework for succession in the business.  This is a good reminder that careful business succession planning may help save taxes and provide other benefits in addition to simply determining who will run the company.

There is an increasing interest in asset protection among both individuals and businesses.   But many people are still not exactly sure what "asset protection planning" is.

Asset protection planning is simply the process of lawfully protecting your personal and/or business assets from creditors.  It involves taking advantage of laws and legal doctrines that were actually designed to help you protect your assets.

"Asset protection" sometimes has a bad connotation due in part to illegal offshore tax haven schemes and other questionable planning techniques.  Many asset protection strategies, however, are ethical and highly advisable.  An analogy can be drawn to tax planning.  Some schemes that are called "tax planning" are nothing more than illegal and fraudulent evasions of taxes.  Legitimate tax planning, however, is essential for both businesses and individuals.  Similarly, legitimate asset protection planning is important for businesses and individuals, especially in our litigious society.

Asset protection planning makes use of laws that were designed to enable organizations and individuals to protect their assets.  There are numerous asset protection alternatives for individuals, including maximizing contributions to IRA’s and qualified retirement plans; using various forms of trusts (including domestic asset protection trusts, irrevocable life insurance trusts, dynasty trusts, and qualified personal residence trusts); retitling various assets; utilizing limited liability companies to protect real estate and other investments; and using life insurance in certain instances.  There are also a variety of strategies for lawfully protecting assets of your business, including using separate entities for certain business functions; using limited liability companies; using insurance as protection; and various other strategies.  There are many alternatives that are perfectly lawful and appropriate.  Fraudulent conveyance statutes and other laws are designed to prevent abuses, but there are a wide variety of asset protection strategies that can generally be employed to protect your personal and/or business assets.  For a more in-depth discussion of asset protection strategies that might be appropriate for you or your business, you can refer to an article I wrote recently that outlines some of the options.

Current economic conditions, recent high profile business failures, the recent waive of foreclosures, rising bankruptcy filings, and the seemingly endless number of lawsuits filed in the United States each year all illustrate the need for reasonable asset protection strategies.  In this environment, businesses and individuals should have no hesitation whatsoever in taking steps to lawfully protect their assets.