Praveen Saanker

Selling your business ? First get your asset protection plan right..

Kapur, a successful software developer, was selling his business for several million dollars. As is common in such sales, he had to make representations and warranties about the quality of the software. As is also common (more than 45% of the time), the buyer ended up suing the seller for breach of warranty.

Knowing that this was a possibility, Kapur put the proceeds of the sale into an asset protection trust. A year later, when the suit came, his assets were out of the reach of the creditor.

Bottom line

Simple…Anybody selling a business should have an asset protection plan.

Protecting Business Owners Against Liability

Mr & Mrs Kapadia are settled in California with strong roots in India and each own shares in a building-supply company with Mr.Kapadia owning 75% of the stock and Mrs. Kapadia owning 25%. Years ago, they had been told that doing business in corporate form affords the owners a certain degree of asset protection. The problem: that is true if the lawsuit arises out of the operation of the business. But it isn't true if the lawsuit is aimed at Bill or Don personally.

Mr. Kapadia was involved in a minor automobile accident when he was in NJ. He was surprised when we informed him that if the plaintiff obtained a judgment against him, nothing would prevent the plaintiff from obtaining his stock in the company making him the controlling shareholder.

The solution? We coordinated with our Estate Planning Partners in California and converted the company from a corporation to a limited liability company. The result is that there are no shares for the creditor to attach and no possibility of a creditor of one of the owners to seize the assets of the business or otherwise get involved in its operations. Unlike corporate stock, interests in LLCs are protected from claims of creditors in virtually every state

Asset Protection – Case study

 

The company is a successful Delhi based home builder. Over the past few years, following many construction defect lawsuits, the firm found it more and more difficult to carry liability insurance. Coverage was just too expensive. Eventually, the decision was made to stop carrying insurance coverage altogether.

Without insurance coverage, the company-and possibly its owners-were exposed to future lawsuits. Asset protection for the company and its owners was the best alternative to insurance coverage.

The company's operations had to be restructured so that the liability arising out of any one building project would reach only a limited amount of the company's assets, if any. A separate legal entity was established for each construction project. Their protection was enhanced further by having different entities own the real estate and do the developments work.

An additional layer of entities further insulated the individual owners from the liabilities of the business. The ownership of the personal assets of the owners was further restructured.

In its first test, this protective structuring worked as planned-seeing the level of protection it faced, the plaintiff dropped a potential class action lawsuit and accepted a surprisingly low settlement offer.

NRI Banking - Accounts

Repatriable Accounts

Funds that can be transferred or repatriated abroad are maintained in a Non Resident External Bank account. Generally, funds remitted from outside India are credited to this account. Investments made from foreign funds can be repatriated overseas, and such investments are maintained in a Repatriable Demat account.

Non-Resident (External) Rupee (NRE) Accounts

ü  Both Principal and Interest can be repatriated or transferred out of India

ü  Savings rate on NRE accounts is at par with savings rates in resident accounts

ü  Term deposits can be made for 1 to 3 years.

ü  The interest rates on (NRE) Term deposits cannot be higher than LIBOR/SWAP rates as on the last working day of the previous month, for US dollar of corresponding maturity plus 50 basis points.

ü  The interest rates on three year deposits also apply in case the maturity period exceeds three years. The change in interest rate also applies to NRE deposits renewed after their present maturity period.

FCNR (B) Accounts

ü  As in NRE accounts, both principal  and interest are repatriable.

ü  Presently, deposits can be made in 6 specific foreign currencies (US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar and Canadian Dollar).

ü  Interest rate- Fixed or floating within the limits of LIBOR/SWAP rates for the respective currency/corresponding term minus 25 basis points (except Japanese Yen).

ü  The term of deposits can range between 1 to5 years.

NRO Accounts

ü  Only current earnings are repatriable.

ü  Savings NRO accounts are normally operated to credit rupee income from shares, interest, rent from property in India, etc.

ü  In case of term deposits, banks are allowed to determine their own interest rates.

ü  Banks can allow remittance upto USD 1 million per financial year for bonafide purposes from balances in the NRO accounts once taxes are paid out. This limit includes the sale proceeds of immovable properties held by NRIs and PIOs.

Resident Foreign Currency (RFC) Account

NRIs and PIOs returning to India can maintain  an RFC account with an authorized bank in India to transfer funds from their NRE/FCNR (B) accounts. Proceeds of assets held outside India before their return to India can be credited to the RFC account. These funds are free from all restrictions as to their utilization or in investment in any form outside India.

Non-Repatriable Accounts

Non-repatriable funds are those which cannot be taken out of India. These have to be maintained in a separate bank account i.e. a Non Resident Ordinary Bank account.
Investments made from non-repatriable accounts cannot be repatriated but have to be  maintained in a Non-Repatriable Demat account. Money once transferred from an NRE account to an NRO account cannot be transferred back to an NRE account.

Non Resident Ordinary (NRO) Account

ü  When a resident becomes an NRI, his existing savings account is designated as a Non-resident Rupee (NRO) account.

ü  The NRO accounts could be maintained in the nature of current, saving, recurring or term deposits. NRIs can also open NRO accounts for depositing their funds from local transactions.

ü  The interest earned from NRO accounts is accountable to tax laws.

ü  NRO accounts can be opened in the name of NRIs who have left India to take up employment or business temporarily or permanently in a foreign country.

ü  Funds from NRO accounts are not repatriable or transferred to NRE accounts without the prior approval of the RBI.

ü  However, NRIs, PIOs, Foreign Nationals, retired employees or non-resident widows of Indian citizens can remit, through the Authorised Dealer, up to USD one million per calendar year from the NRO account or from income from sale of assets in India.

 

Fate can be Fatal, but proper planning can still save you...Asset Protection Case Study

Gaurav was a fairly wealthy man. He had three beautiful adult children, all of whom were married to great partners. He himself had been married to the same women for 35 years. At the age of 57, Rupali, his still young and beautiful wife, had a car accident that disfigured her face so badly that even plastic surgery did very little to restore her once beautiful countenance.

Gaurav and Rupali  were accustomed to a life that included socializing with what I call "the beautiful people." Some of Rupali’s friends were starlets and quite notable individuals. With the disfigurement resulting from the accident, she never seemed to feel comfortable in the same circles. Ruplai went into a deep depression over this and her Dr. put her on prescription medications for anxiety.

Unfortunately, her withdrawal from the social circles left her home with her feelings and she started turning to alcohol and eventually narcotics as an escape. She started herself in a cycle of being up and down, depending on how much of what substance she had in her. The only time she ventured out of the home was to make a trip to the drive-thru liquor store or to see her "dealer." This was devastating to Gaurav. He couldn't comfort her and she was spinning out of control.

Soon came another car accident - Rupali was inebriated, at fault, and she caused injuries to the other parties. With a DUIA charge under her belt, Gaurav, fearing that the worst was yet to come, set up an asset protection plan making their three children equal beneficiaries.

About eight months passed, Rupali had sought help for her substance abuse and was attending meetings and had been sober for almost six months. Even though her license had been suspended due to accident number two, she still drove to her meetings occasionally, whenever Gaurav or a friend couldn't drive her.

She still struggled with depression but was making what "seemed" like progress. Until one night on her way to a meeting, she decided instead to stop and get a single wine cooler. Tragically, this led to a four-hour relapse and ended in a third automobile accident and the bills soared, as well as the legal fees for her defense and the lawsuits from the victims and their insurance companies.

This story doesn't get any better.

Three months later, Gaurav left town on a business trip and Rupali, so deep in her guilt, shame, depression and loneliness, spent the next four days on a cocaine binge which ended in a cardiac arrest. Gaurav returned from his trip to find his once lovely wife sprawled out on the floor, drugs and paraphernalia scattered about their home.

Suspecting foul play, Gaurav immediately called the paramedics…but it was far too late. Once they pronounced Rupali dead, Gaurav called his oldest son to break the news. The next five hours or so must have been very difficult with the police swarming his home gathering evidence.

Sixteen hours later, when the first of his three children arrived at the house, Gaurav was also dead…his son found him in his study…with an empty bottle of his wife's prescription Klonopin, a half bottle of Kelt Petra "Tour du Monde" on the table in front of him and in his lap…a picture of him and Rupali on their 25th wedding anniversary trip.

This story made the local news and the media had a heyday with it… but none of the judgment creditors were able to access any of Gaurav’s wealth, nobody except his children, because he had set up an ironclad asset protection plan.

Summarising..
This is a story that is so tragic that it's hard to say there were any winners. This story does show the frailty and unpredictability of life. The ONLY positive thing here is that the children weren't further tortured by a long and arduous probate period or watching their parents estate be gobbled up by greedy litigants. The painful loss of both parents was excruciating enough for them.

 

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