need to protect your assets?
what is asset protection planning?
What if you were driving in your neighborhood and accidentally collided with a young child on a bicycle? What if your business start-up venture failed and you couldn’t pay back the loans you personally guaranteed? What if your dog contracted rabies without your knowledge and bit your neighbor’s 2 year old child? Any of these events is likely to trigger a lawsuit against you. Your insurance policies provide a first line of defense, but your policy limits may not cover the entire claim. For those wise enough to plan ahead, asset protection planning will minimize the chance of financial catastrophe.
Asset protection planning involves the use of lawful methods to manage legal risk. It involves arranging financial resources in a way that minimizes the exposure of assets to seizure by future creditors. It is not meant to replace the need for insurance, nor intended to illegally avoid paying debts. Asset protection techniques vary from automatic statutory exemptions to highly complex international strategies with multiple entities involved. The goal of an asset protection attorney is to create a bullet-resistant plan, which provides a sufficient level of protection without substantially hindering the flexibility and control that we all desire over our personal and business assets.
is asset protection planning legal?
Yes. However, asset protection planning is not for the feint of heart. This area is ripe with legal and ethical traps, especially because many techniques involve transfers of assets. Federal and state laws prohibit transactions intended to defeat the claims of creditors that are known or that can be reasonably foreseen. An attorney who assists a client in a transaction that hinders or defrauds a creditor is subject to disciplinary sanctions and personal liability. Asset protection planning is often referred to as a cat and mouse game between the leading minds of asset protection theory versus the personal injury attorneys who seek funding of their contingency fees. It almost goes without saying that the deck is stacked against the “deep pockets” of our society. The fraudulent transfer laws will make planning almost impossible after a lawsuit has been filed, so it’s important to act now.
is asset protection the same thing as hiding assets?
No. The most effective planning does not rely on secrecy or fraudulent intent. A secondary market of asset protection hucksters and shysters continues to grow in this country. Deceptive advertising campaigns by non-attorneys can be found on late night television and various national talk radio shows. Many place heavy pressure on you to buy expensive, but often worthless asset protection kits and structures. Good planning relies on the premise that secrecy is not a prerequisite to effectiveness.
what does this have to do with estate planning?
Estate planning is an excellent vehicle by which to accomplish asset protection. A comprehensive estate plan will incorporate lifetime asset protection for the client and inheritance protection for the client's heirs.
I encourage every client to incorporate asset protection planning into their estate planning. For some clients, especially business owners and real estate investors, it is essential to add one or more lifetime asset protection techniques to the estate plan. For example, a business owner may structure business assets in a family limited liability company (aka family limited partnership) in order to protect personal assets from business-related risks.
what do you mean by "inheritance protection"?
As a response to the changing culture and economy of the United States, I promote the use of trusts for distribution of inheritance in almost all cases. My objective is to educate clients and their families about the use of cutting-edge techniques to protect beneficiaries from losses associated with divorce, lawsuits, taxes, and poor financial management. Even the most responsible, financially-savvy adult child appreciates the minor restrictions of a protected inheritance. Inheritance protection is a priceless gift – something a child cannot achieve without advanced planning by the parent.
what about corporations and LLCs?
Yes, business entity formation is one component of asset protection planning. Many clients choose to establish corporations, limited liability companies, and partnerships to hold legal title to their businesses and investments. I regularly advise clients regarding choice of entity and draft legal documents to establish and maintain the entities.
will a corporation protect my assets from seizure?
No. A creditor can seize your stock and vote to remove you from control of the company. In addition, a creditor can foreclose on your stock and take your assets.
will a limited liability company ("llc") protect my assets from seizure?
Maybe. The answer may first depend on where the LLC is registered. Although all states have LLC statutes, one state may have better protections than another.
The more protective state laws (including Arizona) provide that a charging order is the only remedy a court can use to seize assets from a LLC. This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor, but a judge cannot order a distribution of assets. However, less protective state laws provide that the creditor can foreclose on the LLC membership interests. State laws also differ about whether a creditor has access to the books of the company or whether the charging order constitutes a lien on the member's interest. In sum, the choice of where to register the LLC is a huge factor in determining how much protection a LLC provides.
Another factor is how many members (owners) the LLC has. A one-member LLC is vulnerable because the charging order protection was intended to protect innocent members. If there are no innocent members, the theory is hard to rely upon. At least one state -- Wyoming -- has attempted to protect the one-member LLC by statute, but even this protection is debatable.
If you want maximum protection for a LLC, choose a multiple-member LLC with a restrictive operating agreement. The operating agreement should carefully restrict the rights of a creditor seeking to enforce a judgment against a member. It should be drafted as an "executory contract" where all members have some obligations to the company. Select a state with strict requirements for withdrawal and dissolution. And select a state where creditor rights are very limited by state statute.
what if a creditor attacks my llc and I need to make a distribution from it?
Charging orders protect the assets in the entity, but they do not protect the income stream. For additional protection, you should consider the use of a domestic or foreign asset protection trust. When a third party, independent trustee manages a trust owning LLC membership interests, the trustee will decide when and whether to pay out distributions. Under trust law, the beneficiary's income interest in the trust is protected from creditors if the trustee has full discretion.
Domestic asset protection trusts are relatively new in American law. They are only permitted in a handful of states, such as Delaware, Wyoming, Alaska and Nevada. But they can be very effective at encouraging settlements during litigation. If a creditor knows that it must incur substantial expenses to litigate the case -- and has uncertainty whether the asset protection trust can ever be invaded -- there is a tendency for a creditor to settle.
The combination of a LLC in a favorable state with a domestic asset protection trust is an excellent way to protect S-corp stock.
Foreign asset protection trusts provide the ultimate protection available today. Although they will always require the appointment (and payment) of a foreign Co-trustee, the trust assets may actually stay in the US -- or at least until a possible claim is on the horizon. What creditor would want to bring the lawsuit in a foreign jurisdiction knowing that even a judgment there might not actually lead to seizure of any assets?
what kinds of asset protection planning do you do?
Asset protection planning might involve the following components:
- Business entities (or layered business entities)
- Umbrella insurance policies
- Exemption planning under Arizona law
- Dynasty trusts
- Discretionary trusts
- Special needs trusts
- Asset protection trusts (domestic and offshore)
- Credit Shelter and QTIP trusts
- Family Limited Liability Companies
- Gifting strategies
- Separate property agreements
what do you think of nevada corporations and llcs?
Watch out for scams that proclaim the asset protection benefits of Nevada corporations. Simply put, Nevada corporations are not worth the cost for people who don't live in Nevada.
Proponents of the Nevada corporation will emphasize that shareholder information is not public and therefore need not be disclosed on an asset list. But try telling a federal judge that you refuse to provide information because of Nevada’s secrecy laws. You may soon find yourself on the wrong side of the jail bars. And don't forget the audit trail. Most small corporations are S-corps and S-corp income is reported on the shareholder's personal tax return.
Proponents of the Nevada corporation also emphasize that Nevada does not have an income tax. That may be true, but an Arizona resident must pay Arizona state income tax on income wherever located, including from a Nevada S-corporation. And most Arizona C-corporations do not pay any income tax because business expenses (which include salaries) are usually matched up with business income to reduce the effect of double taxation. Thus, any savings with a Nevada C-corporation is minimal or none.
The only people who really benefit from Nevada corporations are Nevada residents who are defendants in Nevada state lawsuits. On the other hand, Nevada is one of several states with excellent statutory protection for LLCs and asset protection trusts. But there are many factors to consider when choosing the situs for an LLC or asset protection trust. For example, you might want to avoid using a Nevada LLC because IRS and state revenue departments are aware of many who attempt to evade taxes in Nevada, and that might cause an increased chance of audit when a Nevada corporation or LLC is used.
what is the best way to protect my assets?
- Don't do stupid things.
- Get adequate insurance.
- Integrate asset protection techniques into your estate plan.
does asset protection planning really make a difference?
If you carry a lot of insurance, maybe not. But in the event you are successfully sued beyond the extent of your insurance coverage, the benefits of an asset protection plan are clear. First, you will be in a better position during settlement negotiations should a lawsuit occur. Second, it may be possible to lower your insurance premiums. Third, you can go about your business with more confidence knowing that your personal assets are adequately protected from frivolous lawsuits.
do I need an asset protection plan?
The best way to determine whether you need an asset protection plan is to print and complete the worksheet posted below.
Don't delay. If you procrastinate until a claim arises, it will be too late.
Thomas J. Bouman, Attorney
Bouman Law Firm
7650 E. Broadway Blvd. #108
Tucson, AZ 85710
(520) 546-3558
