Protecting your Assets from Lawsuits and Creditors
Investment and Asset Management
All the estate planning in the world won’t do you much good if you have no assets to leave to your family. Protecting what you have is particularly important if your business, profession or personal activities expose you to frivolous lawsuits or creditor claims.
Two of the most effective asset protection vehicles are trusts and limited liability companies (LLCs). Each type of entity has advantages and disadvantages, so the right one for you depends on your circumstances and objectives.
Irrevocable Legal Arrangement
A trust is a legal entity you establish to hold assets such as cash, investments or real estate for the ultimate benefit of your spouse, children or other loved ones. The trust document designates one or more trustees and successor trustees to manage the trust. It also specifies the conditions under which the assets will be distributed to your named beneficiaries.
Generally, to protect your assets from creditors, the trust must be irrevocable, meaning you must relinquish most control over the assets it holds. You should also avoid naming yourself as a discretionary beneficiary, although that may be permissible in states that authorize domestic asset protection trusts (DAPTs). Another option is an offshore trust, which offers strong asset protection and may even allow you to access the assets down the road.
There are several advantages to trusts. For example:
- They’re relatively inexpensive to set up and maintain,
- They’re usually private — that is, they don’t require any public filings and
- Trust assets generally are exempt from probate.
The main disadvantage of trusts is that to provide asset protection they need to be irrevocable. That means you must give up control of the assets. Plus, protection from creditors ends after your beneficiaries take ownership of them.
Flexible Business Entity
An LLC is a business entity that combines the liability protection of a corporation with the flexibility and tax advantages of a partnership. To protect your assets, establish an LLC, transfer assets to the entity, and then gift or sell membership interests to your spouse, children or others.
The LLC structure facilitates a transfer of wealth while providing strong asset protection to you and the other members. Generally, the members’ personal creditors can’t effectively reach the LLC’s assets. Conversely, the LLC’s creditors can’t reach the members’ personal assets.
LLCs are generally more costly and time consuming to set up and maintain than trusts, and because they require public filings, some personal information may have to be disclosed. What’s more, avoiding probate may be more challenging (though still possible). But LLCs provide asset protection while allowing you to maintain complete control over the assets by retaining a controlling interest in the entity. Plus, this protection
can extend beyond your lifetime. When your loved ones take control, they continue to enjoy the liability protection provided by the LLC structure.
Sooner the better
Asset protection strategies only protect you against unanticipated creditor claims that arise in the future. You can’t use them to avoid liability for existing or reasonably foreseeable claims. Federal and state fraudulent conveyance laws prohibit transfers of property (to a trust or LLC, for example) with the intent to hinder, delay or defraud existing or foreseeable future creditors. Also, certain obligations — such as taxes, alimony or child support — are difficult, if not impossible, to avoid.
Therefore, the sooner you implement an asset protection strategy the better. Discuss your situation and needs with your Lenox Advisor.
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