LLC Asset Protection Strategies: Everything You Need To Know
LLC asset protection strategies are designed to shield the assets of your LLC from judgments and lawsuits as well as unforeseen accidents and circumstances.3 min read
LLC asset protection strategies are designed to shield the assets of your limited liability company from judgments and lawsuits as well as unforeseen accidents and circumstances. These can include financial plans and legal tools, such as certain business entities and trusts. Protecting your assets assists with estate planning, achieving financial goals, and preserving the viability of your business.
Limited Liability Companies
LLCs are often established as a vehicle to protect assets. The statutes that govern this business entity prevent creditors for seizing the business or its assets. Instead, the creditor will receive a charging order, which entitles them to LLC distributions. However, these are not enforceable and are subject to income tax when they are received. The states that offer the highest level of asset protection for LLCs include Delaware, Nevada, and Wyoming.
A charging order will also not give your creditor voting rights. It simply requires distributions to be paid to the creditor before they are paid to you as the owner.
Many individuals who own real estate establish a separate LLC for each property. This means that a lawsuit impacting one of your rental properties will not affect the others as they are each held in a separate company.
Asset Protection Trusts
This is widely considered the best method of protecting company money from lawsuits and is one of the only asset protection strategies to reliably do so. Typically, an asset protection trust is formed overseas out of local jurisdictions. This prevents the courts from accessing the funds. Liquid assets are best protected by this method. The strongest locations for asset protection are in Nevis and the Cook Islands.
The use of asset protection trusts is legal in 16 states as of September 2016, including Wyoming, Virginia, Utah, Tennessee, South Dakota, Rhode Island, Oklahoma, Ohio, New Hampshire, Nevada, Missouri, Mississippi, Hawaii, Delaware, Colorado, and Alaska. Most states have laws that cover:
- Whether the asset protection trust is irrevocable
- Whether the grantor can be a principal beneficiary of the income and principle, discretionary, or income
- Whether the trustee must live in the domestic asset protection trust (DAPT) state
- Whether any level of trust administration must take place in that state
The trustee is responsible for distributing assets and otherwise administering the trust based on the established provisions. These may include protective strategies such as the decanting of trust assets or the designation of a trust protector or independent trustee.
Certain creditors can seize assets from a DAPT, including children to whom you owe child support, a spouse during divorce proceedings, a creditor who files suit within the statute of limitations, and those with claims associated with property damage, personal injury, or death dating to before the trust was formed.
When forming an asset protection trust, you must avoid fraudulent transfer. Your creditors will be able to access the trust assets if they have evidence that you had the intention to defraud them. You need to consult an experienced attorney about case law and state law that applies to your situation.
Own Assets in Another Name
Only exempt assets should be held in your personal name if you are concerned about creditors coming after your accounts and property. Assets in your name will come up as soon as the creditor's attorney conducts a search. For example, you can own your car in the name of a title holding trust and property in a land trust. These trusts keep your name out of the public records and can include provisions for assets to be passed to your beneficiaries.
Minimize Vulnerable Capital Held By a Business
Business owners should avoid investing significant capital into the operating entity of their business. You can protect the assets of your core company using methods that include:
- Leasing exempt assets owned by the business owner to the operating entity. This is most effective for businesses that have a low risk of causing personal injury. Assets in question can include cars, furniture, and office equipment.
- Strategically combining debt funding and equity
- Regularly withdrawing vulnerable funds based on a systematic procedure
- Using liens to tie up the operating entity's assets with the holding entity
If you need help with LLC asset protection strategies, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.