Five Legal Tools to Protect Your Assets from Lawsuits
Are you protecting your hard-earned assets from lawsuits? Most people are not, and by the time you’re slapped with a lawsuit, it’s likely too late. We live in a litigious society, and this could end up being a costly oversight. Luckily, you can take a number of steps to make sure you don’t lose your most important possessions. We’ve listed five legal tools for you to use in order to protect your assets from lawsuits.
1. Land Trusts
A land trust provides privacy of ownership for real estate. While not purely an asset protection tool, it can reduce the likelihood that a lawyer will take a case against you on a contingent fee basis. A land trust is an agreement among a “trustee,” who agrees to hold title to a property, and one or more “beneficiaries,” who receive the benefits of the trust, and a “trustor,” who’s the creator of the trust and who is usually the original titleholder to the property. Land trusts are often created so that the beneficiary and trustor positions are held by the same people.
The beneficiaries can remain in control of the property, and can receive all income from the trust. The land trust agreement establishes how much influence the trustee is given by the beneficiary, and the trustee often has no other function than to act as the beneficiary directs them. An uncooperative trustee may be replaced as land trusts are generally revocable. They may be changed, modified, and even terminated while the trustor is still alive.
Land trusts provides privacy of ownership. The trustee holds title as a fiduciary. The trustee incurs little to no personal liability for simply being on the title. The beneficiaries, on the other hand, cannot lose the property to their personal creditors. It may even defer litigators from suing, since they do not realize that you own the property and they are generally not interested in people without assets. Public records won’t reveal this information.
To summarize the benefits of a land trust; your identity as the legal owner of the property will only be required to be disclosed to the public or a third party in cases of subpoena or by a court order. Regular searches will not reveal you as the owner of the property. You can change the beneficiary of the trust without recording a change in the public records. The transfer of property into a land trust can often be accomplished tax-free, and you remain eligible for homeowner’s and senior citizen’s real estate tax exemptions. If you own real estate together with others, a land trust can be structured to provide for clear and easy legal direction for multiple owners.
Keep in mind that a land trust is a privacy device, and not a corporate entity, and does not enjoy the liability protection of corporations or limited liability companies. If someone slips and falls on the property, the beneficiary can still be held liable. This is the reason that LLCs are often established to stand in as beneficiary, as we will discuss next.
LLC stands for limited liability company, which can be set up to offer protection from personal liability in case your business is sued. This means that if the business can’t pay a creditor, there are legal provisions to help prevent the credit from coming after personal possessions of an LLC member. So, his or her house, cars, and other valuables can be safe and secure. As an LLC owner, you risk losing no more than the money you have invested in the LLC. This is the very feature called “limited liability.”
For the protection of the LLC to stand strong, you must use it properly. LLC owners can be held personally liable if they personally and directly injure someone or personally guarantee a bank loan or business debt on which the LLC defaults. LLC owners are also personally responsible for failing to deposit taxes withheld from employees’ wages, or if they intentionally do something illegal or reckless that causes harm to the company or to a person.
Also, if owners don’t treat the LLC as a separate business, but as an as an extension of their personal affairs, a court might decide that the LLC is not run like the business it was intended as, but that the owners are conducting business as individuals, and therefore are personally liable for their acts. So, don’t pay your personal light bill with your LLC bank account. Pay money from your LLC account into your personal account and pay your power bill from your personal account. In other words, treat your company as a separate person.
There are tax advantages to an LLC. It can be taxed as a sole proprietorship or disregarded entity, a partnership, an S-corporation or a C-corporation. The sole proprietorship or partnership taxation method are assumed by default unless extra tax filings are made. How it is taxed does not typically affect how it protects you from lawsuits.
Corporations are more commonly used to operate active businesses than LLCs are. While the primary benefits of operating as a corporation usually revolve around tax and marketing benefits for larger businesses, it can also protect your personal assets. For example, if one of your employees does something that causes the company to be sued, the lawsuit can be contained inside of the corporation cubby-hole. This can protect your personal asset from being taken in a business lawsuit. It is also easier to transfer ownership in a corporation compared to a sole proprietorship or a partnership. Plus, there tends to be more tax deductions available to corporations than other business types.
Even if you are technically an employee and/or a shareholder of your own corporation, litigators may still sue you personally for actions you performed through your corporation. As an example, if you create an ad campaign for your corporation which is criticizing a competitor, the competitor may view the campaign malicious and decide to sue. If your competitor wins, you will likely not be liable for the settlement which the corporation has to pay as a result of the suit. However, your personal assets could be attached to pay off any judgment the competitor won in its case against you as an individual. This underlines the importance to protect your assets with multiple strategies. You may also have to come up with your own money to fight the personal lawsuit.
4. Equity Stripping
Equity stripping is a process of reducing the overall equity in a property in order to keep it away from creditors. It’s considered one of the simplest asset protection methods, as well as one of the most successful. Remember how litigators are generally not interested in people without assets? By giving another party a claim against a property, owners are able to retain control over the cash flows and use of the asset. At the same time they are making the property unattractive to creditors attempting to enforce some type of legal judgment. A common form of equity stripping is home equity lines of credit (HELOC).
A HELOC means that the lender is given a lien against the equity of the property, which serves as collateral for the loan. HELOCs make it difficult as well as costly for creditors to get at the actual equity in a property, so they often deter from starting any legal proceedings. Placing a HELOC on a property also provides a source of funds that can be used for emergencies or any other financial obligations. It’s easy and inexpensive to set up, and will not add financial risk such as required interest and principal repayments. A HELOC offers an effective strategy to discourage a party from going after your property, since creditors cannot tell how much is actually owed to the bank. If you want to, you can max out your HELOC and send the funds to an offshore trust, which we discuss next.
5. Offshore Asset Protection Trust
The offshore asset protection trust is set up in a similar way to the land trust, but offers the ultimate protections as no judge in your country can compel a foreign trustee to release funds and assets to a creditor. Even if a creditor is determined to pursue assets held in an offshore trust, the legal battle has to first be won locally and then within the offshore trust’s jurisdiction. This is very expensive, and will make it highly unlikely for a creditor to pursue offshore assets.
As with all the alternatives listed above, the best time to set up your offshore trust is before any legal action is taken against you. If you’re looking to protect your assets from a possible lawsuit, the time to set up your land trust, LLC, corporation, HELOC or offshore trust is not tomorrow or next week, but now.
By Annika Andersson