Accounts Receivable Protection and Leveraging

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Asset Protection: Concepts & Strategies for keeping Assets Safe

Asset Protection, published by McGraw Hill in 2004, is co-authored by Chris Riser, the Managing Member of Axius Risk Consulting LLC. Mr. Riser is admitted to practice as an attorney in North Carolina and Georgia, and as a Solicitor in England & Wales. He is Vice-Chair of the American Bar Association's Asset Protection Planning Committee.

Physicians, attorneys, contractors, and other businesspeople always must be vigilant to protect business and personal assets from lawsuit creditors. Insurance is not always enough. Furthermore, as a business person, you have to be concerned about significant losses due to not just your own conduct. You must be concerned about losses due to the conduct of your business partners and even losses due to the financial failure of your insurers. A judgment creditor pursuing you or your partner for a claim related to your business will pursue the assets of your business assets as well. Accounts receivable often are a business's most available, valuable and vulnerable assets. Accounts receivable are as good as cash to a creditor, who usually has to do no more than seize them and wait no more than a few months to collect on all of them. If a creditor has seized your A/R, how will your business meet its expenses? How will it pay your salaries?

If you don't have the answers to those questions, it is time to protect your A/R. A/R are best protected by encumbering them with an ongoing lien. A number of finance companies will lend 100% of a firm's A/R, on a secured basis, at very favorable interest rates. The lender's loan is secured by a lien against the A/R.

The loan proceeds are not taxable income to the firm. In a properly structured A/R protection and leveraging plan, the interest payments on the loan will be tax-deductible, which may make the effective cost of the loan considerably lower, depending on the business structure. In today's low-interest climate, the effective interest rate can be as low as 3%.

Of course, cash in the practice is even more vulnerable than A/R, so what next? There are at least three basic options. First, the loan proceeds simply can be distributed to the firm members. These distributions are taxable to the members, but of course, they are deductible to the firm. The second option is to use the loan proceeds to fund a retirement plan - either non-qualified or qualified, depending on the size and structure of the firm and any existing retirement plans. For many firms and their owners, this can be the "holy grail" of asset protection planning. They convert a highly vulnerable asset, A/R, into a nearly bulletproof retirement plan, usually funded in one way or another with life insurance. The life insurance policies also secure the A/R loan, protecting the lender, but also protecting the policy from other creditors. If the plan is tax-qualified, it is likely protected from creditors by federal law and perhaps by state law as well. Non-qualified plans are often well-protected by state law. Furthermore, life insurance is often well-protected by state law. Changes to the Bankruptcy Code made in 2005 make life insurance and retirement plans even more important asset protection planning tools.

Remember that the interest payments on the A/R loan are tax-deductible, making the after-tax cost of the loan perhaps as low as 4%, for example. If the life insurance policies or annuities funding the retirement plans are crediting, for example, 5% or more tax-free, the business owner actually makes money with the A/R protection and leveraging plan. After a number of years, tax-free policy loans (in the case of a life insurance funded plan) are used to pay back the A/R loan principal. The cash value remaining in the policies - free money earned through interest rate arbitrage - will be available to the owner for supplemental income. Even business owners with health or age issues for whom life insurance is impractical can participate by having life insurance for a spouse.

Beware aggressive and poorly designed A/R financing plans. The details outlined above are simplified for the sake of presentation here. Many promoters, especially insurance salespeople, are pushing A/R financing plans. With our A/R protection and leveraging strategy, Axius can help clients and their advisors protect A/R from creditors, and put A/R to work to increase after-tax retirement income with the assurance that the design and implementation of the plan is overseen by a highly competent team of tax and benefits planning professionals.

For more information, contact Chris Riser by e-mail at criser at axiusgroup dot com.

The information given at this Web site is provided solely for general educational purposes and does not constitute legal, tax, or accounting advice or opinion and must not be regarded as such. Please consult with an experienced and properly licensed professional regarding the specific suitability of any planning technique described in this Web site or elsewhere. If you have a legal matter requiring attention, please consult with a properly licensed attorney. All clients of Axius Risk Consulting LLC must be committed to full and forthright tax compliance in the United States and in all other relevant jurisdictions.