Mary Carollo: Which Asset Protection Tool is Best?

The first thing a lawyer will do when considering a case against you on a contingent fee basis is to do an asset search. It’s the same thing an experienced litigant will do before handing over a hefty retainer. When he or she is attempting to discover the amount of money you possess, you need to remember that real estate deed copies and taxes paid on your property are available for public consumption. Anyone can access them. As an asset protection lawyer, one of the best tools we have is to remove your name from the public records database of real estate. Average income in your neighborhood – easily accessible. The car you hold title to in your name – easy to find. Where you work – a simple Internet search will usually do. How much you make and how much you’ve saved – this organization has repeatedly seen private investigators find out without much effort. The secret for how to protect your assets? Secure your wealth and prevent your asset information from going public by using the proper legal tools.

Land Trusts

With a land trust, you can hold title to your property in the name of the trust/trustee instead of your own name. This keeps your name from being associated with it in the public records. So, if someone unknown to you attempts to find out where you live, what property you own or what your real estate holdings are worth, finding that information becomes more difficult. This cloaking is provided by the land trust, which keeps your real property holdings private.

If you plan to establish land trusts for your personal residence or other real estate holdings, the good news is that they are available for use in all states, through common law, whether or not their statutes specifically address them. Remember, not every possible human act has been codified into law. Just like there are no known laws specifically authorizing the wearing of red shoes, what you will eat tonight, and who dates your daughter, not all state statutes specifically address the use of land trusts. They don’t need to. Unless there are laws to the contrary (of which there are none known in the United States), their use is permitted. This organization has established land trusts for use in all U.S. States.

Whereas the land trust is not an asset protection device, it is a privacy tool. Consider making the beneficiary of each land trust a separate limited liability company. For your personal residence, it usually makes most sense to name yourself as the beneficiary from a tax perspective. That way you can take advantage of the interest deduction, the allowable tax-free profits upon the sale of the home, etc.

A mortgage lender cannot forbid the transfer of a home into a land trust if the property is between one and four dwelling units and the owner remains as beneficiary of the trust (Garn St. Germain Depository Institutions Act of 1982). It would be wise to inform the insurance company that your properties are in land trusts.

Title Holding Trusts

Title holding trusts are similar to land trust in that they provide privacy of ownership of non-real estate assets. A title holding trust can be used to own vehicles privately. Since automobile ownership is a matter of public record, why own them in your name? If you own a newer 500 series Mercedes-Benz, a 600 series BMW, high-end Tesla or the like, a potential plaintiff or contingent fee attorney can easily find out. That could get his or her juices flowing that you are a deep-pocket.

Filing a lawsuit or taking a case on a contingent fee basis is a business decision. When they look for what you have and find no real estate and no cars, they’ll think twice about proceeding with case. Like land trusts, title holding trusts are not asset protection tools, they are privacy tools. This organization has seen hundreds of people keep cars that they would have otherwise lost by merely disguising their ownership in title holding trusts.

Living Trusts

For estate planning, there are few tools as good as the living trust. When you form a living trust, the trustee can be you or someone else. A living trust can act as the serving tray upon which your assets are served to your heirs up on your death. Your estate can avoid probate fees – the legal process of transferring assets from the deceased to the living. There are no such fees because the title to the property doesn’t need to change. It’s still in the trust. Your heirs simply become the new beneficiaries.

Instead of hearing, “First I’ll need a $10,000 retainer,” from an estate lawyer your heirs simply take the trust and a death certificate down to the bank and the money is theirs. Alternatively, you may have the trust drafted such that a trustee or trust company steps in and provides specified amounts at specified ages, regular support payments, payments for education, living expenses, etc. You can require your heirs to accomplish specified goals, such as certain levels of educational attainment in order to receive specified amounts. Your trust, your choice. This gives you control of how your assets are distributed long after your death.

Just like there are different motor vehicles for different uses, there are different trusts for different uses. There are powerful asset protection trusts that are available. However, a living trust is not an asset protection tool. It is an estate planning tool. Its main purpose is to give your heirs access to your assets when your days are done.

Corporations for Asset Protection

Corporations are useful for legally protecting yourself from business lawsuits. A corporation is considered a separate “person.” When that person is sued, the lawsuit is directed at it, not you. Thus, the corporation can act as a wall between you and your business to help protect your personal assets.

When you operate your business as a privately held corporation, then you can generally sell stock in your company free from public disclosure, protecting both the price paid and the name of the buyer. Just make sure you comply with the state and federal securities statutes. If it becomes a publicly traded company, more disclosures are required.

Most states require corporations to release the names of officers and directors. If you wish, you may elect to have nominee officers and directors who show up in “name only,” but you, as the voting shareholder, have the ultimate control. The names of stockholders typically stay out of the public records.

Corporations also allow for creative maneuvering of assets. For instance, if you are in the process of purchasing expensive equipment or vehicles that are already owned by a corporation, you can have the owner leave the property in the corporation, or place it in a new one, and then transfer the stock in the corporation to you. Make sure to get advice from a CPA on how a transaction of this nature is best handled from a tax perspective.

LLCs and Limited Partnerships (LPs)

For real estate assets, both limited liability companies (LLCs) and Limited Partnerships (LPs) work well for protection. LLC owners do not generally have liability for business debts or actions of employees. The benefit of an LLC is that the one(s) in charge, the managers, are shielded from business liability. With a limited partnership, on the other hand, the general partner (GP) is vulnerable. So, LLCs are now used almost exclusively instead of LPs.

Furthermore, as long as your LLC has been properly established, if you get sued in your personal life, there are legal provisions that can protect you from losing your membership in your LLC. They may get a judgment against you. But there are laws preventing them from taking your LLC or anything inside of it.

LLCs are also great tools to own passive investments. Unlike a corporation, which doesn’t usually work well from a tax perspective for owning a stock brokerage account, a LLCs default tax flow-through status allows you to take deductions and report gains as if you held the investments in your own name. However, unlike holding them in your own name the LLC offers favorable asset protection advantages which are discussed below,

It is usually a fast process to form an LLC in most states. Have it set up professionally because there is quite a bit to it, including drafting the articles, operating agreement, membership certificates, etc. You want to make sure that when you need it to protect you that it was set up right. If you missed something, you can believe that your opponent’s attorney will make a major issue of it in court and drive a truck right through it. So don’t scrimp. Have it set up by someone who does it every workday.

LP and LLC Background

Before the invention of LLCs, limited partnership were one of the most common tools used to own real estate. With either structure, your property can protected when you are sued personally. Why can someone not take your LP or LLC if you are sued? There is a reasoning behind this; mostly, fairness. To make sure the actions of one partner or member do not affect the actions of others, judgment creditors generally cannot take these entities, nor can they seize the property inside.

An LP used for asset protection purposes is typically structured as a family limited partnership, or FLP. An FLP is simply a limited partnership where the only partners are members of a family. (The same is true for members of a family LLC or FLLC.) Both an FLP and LP are set up with written agreements between at least two individuals. There are at least two types of partners, a general partner and a limited partner.

The general partner runs the business and is liable for debts of and lawsuits against the partnership. That is why a corporation or LLC is usually placed in that position.

The limited partner is a passive investor and does perform actions within the business. The limited partner is also not liable when the LP is sued. If a limited partner does start to manage the LP, however, he will be legally considered to be a general partner with all of the associated liabilities. So, if a limited partner wants to perform services for the LP, he or she will want to perform those services as an agent of the corporation or LLC that serves as the general partner. Contracts will be signed, for example, “Pat Smith, Manager of XYZ LLC, as general partner of ABC, LP.”

LLC & LP Owners

Whereas a one-person LLC is quite common, an LP requires at least two partners. A one-human LP, however, is possible where one partner is a natural person and the other is a legal person, such as a corporation or LLC. A man named John can hold, for example, a 95% interest as a limited partner, and the LLC he owns can hold a 5% interest as a general partner.

Profit sharing can occur between or among partners depending on their percentage of ownership. If the written limited partnership agreement allows it, the general partner can receive income over and above his, her or its proportional ownership interest.