To give yourself asset protection from lawsuits, there are a number of strategies an individual can employ. We will talk about legal tools you can employ, what to do and how it works. The bottom line is that you need to be proactive and establish the proper legal tools. Then you need to title your assets within these structures. Three methods discussed here include the following:
- Limited liability companies (LLCs).
- Using a trust protect your assets from creditors.
- Using retirement accounts.
Businesspeople can use one or all of these methods. Each method offered here offers a certain amount of protection from possible lawsuits and creditors.
LLCs and Asset Protection from Lawsuits
Here is an important measure nearly all investors can take to protect their personal assets from lawsuits and creditors. Form a limited liability company and put your assets into it. Keep in mind, there are limitations to the protection of assets offered by a single LLC. Clumping liability-prone assets into one LLC means that a lawsuit pertaining to one asset can leave the other ones vulnerable to seizure. Thus, it is important for an investor to form one or more LLCs to protect assets. Each LLC acts as a liability cubbyhole that keeps lawsuit away from other assets. This is one reason why so many real estate investors form a new LLC for every property they buy. Additionally, investors often use additional tools such as asset protection trust and land trusts, where appropriate.
Forming an LLC allows an investor to make a new legal entity that the law considers separate from the owners. As such, this distance creates a certain amount of liability protection. For example, if the LLC defaults on certain debts, its assets may be up for grabs. But the assets of the owners are kept separate from that threat. The only assets that are threatened by legal action or creditors are those the owner placed in the business.
However, owners do need to pay debts they guaranteed personally and may be responsible for things like unpaid payroll obligation. Illicit or fraudulent wrongdoing done on behalf of the LLC is another. As a consequence of their actions may also cause them to lose personal assets.
LLC Asset Protection Strategies
There is decreased liability offered by LLC formation in addition to asset protection strategies that can be employed. Liability protection means when the business is sued, the owners and managers can be shielded from that lawsuit. Protecting assets comes into play when the LLC members are attacked legally for a personal matter. The LLC acts to protect the assets held inside the company from being taken away from the owners. There are substantial tax benefits. Additionally, there are a few other benefits to consider what you can take advantage of with your LLC formation.
LLC Asset Protection Tips
Here are some tips when using LLCs to protect assets from lawsuits:
- Each time you buy a new property, make sure to create a land trust, for privacy of ownership. Each land trust should be owned by a new LLC. Technically speaking, the LLC is the beneficiary of the land trust. Sealing off the property in the LLC and place it into a land trust. By doing so, you offer multiple strategies for protection and privacy for each real estate investment.
- Keeping your assets spread out like this helps to keep them protected. Keeping everything separate ensures that a lawsuit on one property does not leave other properties vulnerable to seizure.
- As stated, the concept of keeping a separate LLC for each real estate investment helps to protect the loss of all of your investments in a lawsuit. So, too, valuable business assets can also be held under separate LLCs. Again, this helps to keep all of your assets away from creditors in case of lawsuits. Your main corporation or LLC that operates your business then signs lease agreements with the LLCs that own the equipment. By taking these steps, if your main company winds up getting sued, there are few assets of interest for creditors to seize.
- Make sure that each business you set up is formed as a separate LLC, keeping it apart from the others. By separating these valuable resources, you spread out your assets and liability in the event that a lawsuit attacks your main company.
An Even Stronger Strategy
- An even stronger protective strategy is to have both an additional LLC established offshore that holds an offshore account. This can be done as your company increases its profits and value. Offshore LLCs and accounts typically offer increased asset protection from creditors in comparison. It makes a big difference if assets are held in a company beyond the reach of the courts. Of course, jurisdictional rules and regulations apply. But for the most part, it is far more difficult for creditors to obtain assets tied up in an offshore LLC and offshore account.
- Stepping it up a notch higher, have the offshore LLC owned by an offshore asset protection trust. With an offshore trustee, you now have a person in place who is not bound by your local court orders. So, if the judge demands the money to be returned, the trustee can refuse to comply.
- Make sure to stay on top of paying your yearly fees. Keep your business entities all current and legal as you pursue this strategy. The fees are usually quite reasonable. Forgetting any of this can not only undo your asset protection, but cause you other litigation problems and late fees. It is wise to utilize the strategy of multiple LLCs to protect your assets. You just need to stay on top of the fees at hand to keep your companies current.
- You need to retain a registered agent at all times for your business entities. A registered agent is not only usually required for LLC formation both in the United States and offshore, but also an important part of an strategy to protect your assets from lawsuits. They can guide individual business owners through the process of keeping documentation and fees current. They can also help to ensure that the entities remain in good standing. (This organization performs company formation and is in the registered agent profession.)
Other Important Items
- Make sure you pay close attention to real estate liens that may exist against any of your piece of real estate. You need to increase the number of companies as you increase your holdings.
- It may be very beneficial to have your company establish a 401K retirement plan. Retirement plans offer an increased amount of asset protection from creditors and typically cannot be seized through certain types of litigation.
Trusts as an Asset Protection Strategy
Asset protection trusts can offer powerful security to investors and business owners and is another option to strongly consider. Investors have the choice of setting up either an onshore or offshore trust, or both, depending on their needs. For the most part, it is recommended that an individual set up an offshore trust for asset protection if he or she has a large net worth.
To understand this a bit better, know that in the United States, two types of trusts exist, in this context. One is known as a US domestic grantor trust. In the US, it is tax neutral and does not require significant compliance standards. The formation of this type of trust usually obtains a pass through on tax needs to the trust’s grantor. Furthermore, the formation of a trust is under the jurisdiction of the local courts.
Foreign Trust – More Effective
The second type of trust, generally considered to be a true foreign trust, is a much more powerful tool to protect assets from lawsuits. The formation of this type of trust means that local courts do not have the rights to easily seize assets in the trust. This is because the funds and the trustee are located offshore.
As far as US domestic trusts are concerned, they also present many issues for investors seeking to use trusts for asset protections. Some of the problems offered by US domestic trusts include conflicting law issues. They can vary from region to region and confuse both the attorneys and the judges. Full Faith and Credit laws which cause certain state laws to apply to other states vary. Judges who want results and may not always decide based on the law. Fraudulent Conveyances Statutes that can legally interfere with domestic trust transfers in a way that offshore trusts do not allow. Bankruptcy law may give creditors a free pass into your trust’s wealth if it is located in a domestic trust.
So, the big question is does it work? The answer is that domestic trust do not work well. Offshore trusts work extremely well. To underscore this, every offshore trust that we have established for clients has been effective at keeping its assets from creditors.
If you do form a domestic trust, remember to consider forming a Medicare Trust. It can help you qualify for government assistance with nursing home costs. It can help cover future medical expenses and give financial relief in a medical emergency. To benefit from a Medicare Trust, you need to be at least 70 years old. Plus, you should plan on setting up the trust at least five years before you believe you require it. Aging the trust and placing assets into it before it is needed is required to ensure your eligibility for government medical assistance.
Also, with any trust, one step you cannot ignore is remembering to revise your trusts for your children. First, anytime you have a new child or wish to add one of your children to the trust, you need to revise the trust as soon as possible. Let’s say a child is lazy. A child may exhibit behavior such as drug use that concern you enough to withhold your wealth from that child. You can include such restrictions in your trust. If you feel one of your children may not deserve a piece of your trust, then this is a factor you should consider.
Retirement Account Protection
There are three types of retirement accounts that may offer asset protection from lawsuits.
- First, there is the “qualified retirement plan,” which is one of the most protected types of retirement accounts. This includes the common 401k and 403b employment plans. These retirement plans cannot be touched in civil court judgments, and may still be maintained even if one declares bankruptcy.
- IRAs, including Roth IRAs and Traditional IRAs, is a second type of retirement plan that can protect assets from lawsuits. Bankruptcy law typically allows you to still keep up to one million dollars of assets in those plans. However, your state will determine any civil court judgment angles as legal statutes and interpretations can vary depending on where you live. Furthermore, the overall protection typically offered by these plans varies from state to state. In California, for example and IRA may be seized if it is determined that you can be supported in retirement from other means.
- Last, SEP IRAs typically receive unlimited federal protection from bankruptcy. But the level of protection offered can vary from state to state. Some litigation uncertainty exists with these types of accounts with respect to civil judgments.