Are You Protected?
Do any of these apply to you?
- I drive a car.
- I own a firearm.
- I own a business.
- I own investment property.
- I have saved money for my retirement.
If you fit into one or more of these categories, you have a target on your back, even if you do not realize you are under the gun. Every day in the United States accidents or other events happen that create the potential for personal liability. Through no fault of your own, your life could be irreparably tied up in that event, eventually ending with your financial ruin. Given that an estimated 40 million lawsuits are filed each year by the estimated 1.3 million attorneys around the country, you can see that lawsuits are big business. Even if you are ultimately successful in defending the suit against you, often the costs of that defense can lead to bankruptcy. That is why you need a plan to protect assets so that if that worse case event happens, you know that there will be personal resources available to you when the dust settles.
Liabilities can generally be referred to as “inside” liabilities and “outside” liabilities. An example of an “inside” liability would be a tenant in your rental property that is injured and files suit. This plaintiff wants to get to you personally. Conversely, an “outside” liability would be a car wreck where the person you hit is suing you personally but would like to be able to use your rental property to pay any judgment against you. Understanding the difference between the inside and outside liabilities gives you your first insight into how to begin an asset protection analysis. In its simplest form, you want to prevent an inside liability from getting out to you personally and an outside personal liability from reaching your assets.
An Asset Protection Attorney Can Help
In order to separate you from your assets, an asset protection plan will have two primary vehicles available depending on your personal status. The first tools are business entities such as limited liability companies and the second set of tools are trusts. Too often, the uninformed person will confuse these two tools and use them incorrectly. For example, a person might believe that using a limited liability company to shield their second home will protect that home from outside liability. In fact, that plan will likely have no effect. You see, for a business entity to have the protections afforded to it by law, it must have a business purpose. So, if your second home were owned by a limited liability company and you were sued, the plaintiff could easily get past your company protections by showing that you never had any real business purpose for establishing the company in the first place. Alternatively, if the second home was used almost exclusively for vacation rental to others, then an LLC would be a perfect tool since you have a legitimate business purpose. However, if it were simply a second home for your own use, then a domestic asset protection trust would be the optimal tool. To put it in simple terms: business entities are used for business assets and trusts are used for the rest. Now, let’s work on why these two tools work to protect assets.
Business entities such as LLCs are governed by the laws of the state in which it is created. In most states, the laws provide that if the LLC creates a liability, that the liability cannot become a personal liability to the individual owners. This is an almost universal feature of LLCs around the country. But what about where an owner has a personal liability, and the creditor wants to take their interest in the LLC to satisfy the judgment. In some states, the laws limit the creditor to what is called a “charging order.” If a judgment creditor obtains a charging order against an LLC owners’ interest, then that creditor would be entitled to any distributions made to that individual. But, of course, if such a situation existed, no distributions would ever be made to the owner resulting in a very frustrated creditor. But more than that, a judgment creditor can run afoul of tax law that makes that charging order a poisonous pill. The owners of an LLC are responsible for paying taxes on their share of the net income of the company, even if that income is not distributed. If a judgment creditor holds a charging order that entitles them to any income distributed, then according to tax law, the judgment creditor is now responsible for paying taxes on the net income of the business even though no income is distributed. So, it is unlikely that the creditor would want to get a charging order when all that would accomplish would be to cause the creditor to pay more taxes and still not recoup their judgment.
Asset protection trusts provide protections against creditors by virtue of what are referred to as “spendthrift” provisions. Essentially, an asset protection trust would include a clause that stated that the assets of the trust cannot be used to satisfy a creditor of a beneficiary. Since such distributions are prohibited by the very terms of the trust, the creditor of that beneficiary cannot force them to be made. Spendthrift trust provisions are very well-established rules of law and have existed dating back to England before the founding of this country. But not all trusts are created equal. Once again, state laws play a significant role in the creation of asset protections trust. The good thing is, regardless of where a person lives, they can, under the right circumstances, create trusts that are governed under the laws of another state. For example, an Arkansas resident might create a trust based in Texas because Texas does not have a state income tax. A Texas resident might create a trust governed under Alaska law because he wants the trust to continue for 300 years. Ultimately, asset protection trusts should be particularly drafted to meet the individual clients needs and circumstances. There is no “one-size-fits-all” trust.
Contact Us Today to Get Started
In today’s modern world, the threat of losing a persons accumulated wealth due to an unfortunate situation should be a real fear. It's never too early to speak with an experienced asset protection attorney. With four offices throughout Northeast Texas and Southwest Arkansas, we are conveniently located for clients from Dallas to Little Rock. Call, start a chat or fill out our contact form to get started today!