A founder spends a decade building something illiquid and then, over a few months, converts it into a number in a bank account. Everything about the risk profile changes at that moment, and almost all of the useful planning has to happen before it.
This article covers where the exposure actually sits after a sale, why the window closes earlier than people expect, and which parts of the conventional pitch deserve scepticism.
Two risks, often confused
Claims arising out of the transaction
A sale agreement contains representations and warranties about the business, usually backed by an indemnity and often by an escrow holding part of the consideration. If something was wrong – an undisclosed liability, a customer contract that was not what it appeared, a tax position that does not hold – the buyer has a claim, and it can exceed what is held back.
Earn-outs generate their own disputes, because they depend on how the buyer runs the business afterwards. Founders who stay on through an earn-out period are exposed on both sides: to the dispute and to their continuing role.
These claims surface months or years after closing, which is precisely when the proceeds are sitting in an account in the founder’s own name.
Everything that follows visible wealth
The second risk has nothing to do with the deal. Liquid wealth, often accompanied by a press release, changes who takes an interest: former business partners with a theory about what they were owed, employees with equity grievances, family claims, divorce, and the ordinary litigation that attaches to anyone with assets worth pursuing.
This is the risk that persists for decades, and it is the one a structure is genuinely well suited to.
The window, and when it closes
Every developed system has fraudulent transfer or voidable transaction rules. A transfer made with intent to hinder, delay or defraud a creditor can be unwound, as can one made without receiving reasonably equivalent value while insolvent or about to become so. The analysis turns on what was known and foreseeable when the transfer happened.
For a founder, the practical milestones run roughly like this:
- No process, no claim, no approach. Planning here is ordinary estate and risk planning. This is the window.
- Early conversations, a banker engaged. Still generally unremarkable, but the record starts to matter.
- Letter of intent signed. A transaction is now foreseeable, and so are the obligations it will create. Transfers from this point are examined much more closely.
- Diligence under way, or completed. Any issue surfaced in diligence is a known potential claim. Moving assets with that knowledge is exactly the pattern the rules are written for.
- Post-closing, a dispute notified. There is now an identified creditor. See our active lawsuit page before taking any step at all.
The uncomfortable truth is that the best time to do this is when it feels least urgent, and founders are usually busy with something else then. Our article on asset protection for physicians and dentists makes the same point about a different profession, for the same reason.
Shares before the sale, or cash after it
Transferring illiquid shares into a structure before a sale and transferring cash afterwards are different transactions with different consequences.
Pre-sale, the asset is harder to value, which cuts both ways: valuation work is required, but minority and marketability discounts may apply. The structure then holds an interest that converts with the rest of the cap table at completion.
Post-sale, the asset is cash, the value is not in question, and the transfer is simple – but the planning window has usually narrowed, and any transaction-related claim is by then much closer to foreseeable.
There is a tax question here that belongs with the deal’s own counsel, not with a structuring discussion. Moving shares before a sale can affect how the gain is treated, can disturb holding periods, and in the United States can affect the availability of specific reliefs that depend on who held the stock and for how long. Nothing in this article should be read as advice on that point. Raise it with the transaction’s tax adviser before any share moves, because the sequencing cannot be undone afterwards.
What the structure does, and what it does not
An offshore asset protection trust changes a creditor’s procedural position. A judgment obtained at home generally cannot be registered and executed against trust assets; the creditor has to litigate afresh in the trust’s jurisdiction, under its law, within a short limitation period and to a demanding standard of proof. That changes the economics of pursuing the claim, usually well before anything is tested. Our how it works page sets out the mechanics, and case law covers what has actually been litigated – including the cases that went badly for the settlor.
What it does not do deserves equal space.
It is not a tax structure. For a US person, a foreign trust they settled is generally treated as a grantor trust: the income is taxed to them as though the trust did not exist. It is fully reportable on Forms 3520 and 3520-A, with FBAR and FATCA reporting alongside. It does not reduce the tax on the sale by a dollar. If a structure is being sold to you on the basis that it will, stop the conversation.
It does not help once a claim exists. Covered above.
It does not replace the deal’s own protections. Representation and warranty insurance, a properly negotiated indemnity cap, a sensible escrow and a disclosure schedule that actually discloses are the first line. A structure sits behind them.
A workable sequence
- Separate personal and business assets properly, well before a process starts. Observed formalities, not just paperwork.
- Maximise genuinely protected classes – qualified retirement plans first.
- Negotiate the deal’s own protections seriously: indemnity cap, escrow size and duration, warranty insurance.
- Decide on a structure for the residual while no transaction is foreseeable, taking the share-transfer tax question to the deal’s counsel first.
- Complete due diligence with the trustee early – it takes longer than people expect. Our article on trust due diligence covers what will be asked for.
- Report everything correctly, every year, from the first year.
Where to go next
We have pages covering the position for entrepreneurs, business owners and tech professionals, and a breakdown of what a structure costs.
Get in touch to discuss timing against a specific transaction.
