Kevin sums up Asset Protection

One such example is the limited liability company. There are provisions in LLC laws of each state such that when you are sued personally, and you are a member of an LLC, assets held inside of the LLC can be shielded from being taken from you.

When an opponent obtains a judgment against you, the judgment is generally a legal document to pay money to another party. The other party can seize many of the assets you hold directly. This may include money in a bank account, vehicles, homes, etc.

However, when assets are held in an LLC, legal provisions can protect the assets held inside of the company. The judgment creditor may obtain a charging order. The charging order says that money paid to members of the LLC can be seized by the creditor. Since you are in the driver’s seat of the LLC, you will simply let the profits pile up in the LLC. So, if you decide not to distribute LLC profits, they remain inside the LLC. Revenue Ruling 77-137 says that whoever has the right to receive the profits, if they were distributed, is required to pay the taxes on those profits whether distributed or not.

What this means is that your judgment creditor will get a tax bill but no money. Let’s say that another way: Your judgment creditor will receive a tax bill from his share of the LLC profits but – because you will decide to leave the profits in your LLC – he will not receive an actual distribution of the profits.

The limited liability company is one of many asset protection tools. The Cook Islands Trust is another tool for advanced asset protection needs.