Asset Protection Strategies & Case Studies

By Lee S. McCullough, III

The Typical Professional or Business Owner

The typical professional or business owner has work related liabilities that he cannot get away from. For example, a doctor, lawyer, accountant or stock broker always has the possibility of getting sued by a client. A business owner who guarantees the debts of his business has the same type of personal liability. How can the typical professional or business owner protect personal assets from business liabilities?

If the professional or business owner has a spouse that is not subject to potential business liabilities, then the simplest and least expensive asset protection plan is as follows:

1. Create a separate trust for the husband and a separate trust for the wife.
2. The couple should sign an agreement stating that they have allocated their properties among themselves as part of an integrated estate plan, and that any properties in their individual names or trusts are to be characterized as the separate property of the person in whose name or trust the property is titled.
3. Create an estate allocation table as in the example shown below:

In order to maximize the use of each spouse’s unified credit, it is generally recommended that a couple should equalize the value of their estates. Because of the value of the Bills’s life insurance, it is necessary to put most of the other assets in Marilyn’s trust. Thus, the estate allocation table gives us a solid tax purpose for transferring most of the assets to Marilyn’s trust.

This type of asset protection plan is well supported by case law, and it holds up very well if Bill is sued or goes bankrupt, unless transfers are made too late and the court finds that the transfers were made with intent to defraud a creditor.

Asset Protection using LLCs

Many clients cannot use the first option described above because they have no spouse, or the spouse is not free from potential business liabilities. Other clients simply want another layer of asset protection, in addition to the creation of separate marital property.

The next easiest and least expensive option, which works well, involves the use of an LLC filed in Nevada, Alaska, or some other state which does not allow a creditor of a member to foreclose on an LLC interest. Most all LLCs provide protection to the members in the event of a claim against the company itself (unless the creditor can pierce the corporate veil). But only certain states protect the LLC interest itself in the event of a claim against a member.

Under the laws of most states, a creditor of a member of an LLC can foreclose and seize the ownership held by a member of an LLC. In a few states, a creditor of a member of an LLC is limited to a charging order which requires any distributions which are made, to be made to the creditor instead of the member. This provides some asset protection because the creditor cannot foreclose on the interest and they cannot force a distribution from the LLC. Alaska goes a step further and provides that a creditor is not only limited to a charging order, but the creditor is also prohibited from obtaining a court order for inquiries, accountings or directions. (Alaska Statutes 10.50.380).

The laws of every state provide that the internal affairs of a limited liability company are governed by the state where it was filed, not the state where the members reside or where they are sued. This means that if a Utah resident sues a Utah resident for a tort committed in Utah, and the person being sued owns an interest in an Alaska LLC, Alaska law will govern the issue of whether the creditor can get into the LLC. (Utah Code 48-2c-1601).

For example, if a business owner and his spouse both have to personally guarantee the debts of their business, separate property ownership will not provide any asset protection. A couple in this situation may choose to invest their savings and investments in an Alaskan LLC. If the couple owns 100% of the LLC, a creditor in bankruptcy may be able to step into their shoes and exercise the liquidation power for the creditor’s benefit. We can help clients design an LLC structure that gives them the best protection without losing control or flexibility.

In order to protect the equity in their home, they could obtain a line of credit from their Alaska LLC and the LLC could place a lien on their home for the full amount of the line of credit. This would protect the equity in the home. This type of lien could also be used to protect accounts receivable or other assets that are generally very difficult to protect.

Using Irrevocable Trusts for Asset Protection Planning

If a client has an asset or a new business that is likely to increase significantly in value, it is often recommended that the client transfer the asset or the new business to an irrevocable trust at a time when the client is solvent and there is no risk of a fraudulent transfer. The beauty of this technique is that the asset is removed from the client’s financial statement.

If a financial problem comes up in the future and the client is asked to provide a personal financial statement, the client would not include the assets of the irrevocable trust and the creditor may never become aware of the assets. Even if the creditor is aware of the transfer to the irrevocable trust, the creditor cannot reach the assets unless the creditor can prove that the transfer was made with intent to defraud.

We often use Nevada irrevocable trusts because Nevada has a short two year statute of limitations which would bar a creditor from challenging a transfer two years after the transfer is made, if the liability developed after the time of the transfer. Also, Nevada law protects the assets of an irrevocable trust from the creditors of the grantor, even if the grantor is included as a potential beneficiary of the trust.

Other Tools

The techniques described above provide great options in most situations, but other options exist as well.

Some clients don’t have a spouse or children with whom they want to share ownership in an LLC. Others cannot use family members because they share the same liabilities as the client. In these situations, the client can invest in a blind LLC with other partners. This gives the client excellent asset protection while retaining control, flexibility, and confidentiality.

One client owned extremely valuable intellectual property and wanted the best offshore protection available. This client chose to transfer the intellectual property to a Nevis LLC. Nevis is a country in the Caribbean whose LLC statute is considered the best law available for asset protection. Even though there are no current liabilities to worry about, the Nevis LLC gives the client great security and peace of mind.

I am an asset protection attorney, a tax attorney, and a law school professor. I do asset protection planning that is ethical, professional, efficient, thoughtful, and eminently effective. I will provide ongoing support for any plan that I create. If you are interested in asset protection planning, call me or send me an email with a summary of your situation and I will send you a free proposal designed just for you. This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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