As estate planning attorneys, we often advise clients that are concerned about asset protection. They want to take the right steps to preserve their resources for their own purposes, and they also recognize the implications from a legacy perspective. This are wise considerations, and there are some small business and individual asset protection tools in the toolkit.
Limited Liability Companies
The first two asset protection structures that we will look at are used by businesses, and one of them is the limited liability company (LLC). If you start a small enterprise, and you don’t establish any business structure, it would be a sole proprietorship. Under these circumstances, there would be no legal separation between your property and business assets.
As a result, if you were the target of a lawsuit as an individual, in addition to your personally held assets, the business resources would be available to the litigant seeking redress. The same dynamic would exist in the reverse manner. If the business is sued, your personal assets could be attached.
You can completely change this arrangement if you establish a limited liability company. The business would be a separate entity for legal purposes so you would not be liable for actions taken against the LLC, and vice versa. Yet, you could still file business property income and losses on your individual tax form. As a result, you do not lose the streamlined taxation that goes along with a sole proprietorship.
It should be noted that you cannot convey assets into a limited liability company after you know that you are going to be sued, or if litigation has already been initiated. This would be an illegal fraudulent conveyance.
Family Limited Partnerships
Another asset protection option is the family limited partnership (FLP). As the name would indicate, all partners must be members of the same family.
If you establish an FLP, you would be the general partner and the other members that you name would be limited partners. You do not have to be concerned about divesting yourself of total authority, because the general partner would have sole decision-making power.
Assets in the partnership would be protected from legal actions against any of the members, and once again, the partners would be protected from legal actions filed against property held in the partnership.
For example, if there is an apartment building in the partnership and someone is injured on the property, they could sue the partnership, but not the partners.
It is possible to create multiple different partnerships that each hold limited resources. Getting back to the example, if you own four other apartment buildings, you could convey each of them into a separate family limited partnership. The property that is in the other FLPs would not be available to the litigant.
Self-Settled Asset Protection Trusts
There is a potential solution for individuals that want to protect their assets from potential future legal actions by creditors in the form of a self-settled asset protection trust. You may come across the term “domestic asset protection trust” to refer to the same legal device.
Once you convey assets into the trust, which would be irrevocable, you would not be able to directly access the principal or dissolve the trust. You could however continue to receive discretionary distributions from the trust.
Going forward, assets in the trust would be protected from creditors that initiate actions after the trust has been funded. Self-settled asset protection trusts are legal in just 17 states, and Ohio is one of them.
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