Re: Secrecy & Asset Protection - Posted by J.P. Vaughan
Posted by J.P. Vaughan on May 22, 1999 at 13:33:58:
I know you know this, but I want to clarify some issues for others.
There are two different issues:
- Asset Protection
Secrecy (concealing assets) is NOT asset protection.
Secrecy can keep your assets less visible, thereby discouraging potential litigants. But that secrecy will evaporate quickly when a judgment creditor starts searching for your assets with questions like. . .
–Are you or your spouse a grantor, trustee or beneficiary to any trust?
–What major assets have you transferred in the last five years?
–Are you an endorser, co-maker or guarantor to any loan?
–What loans or credit have you applied for over the last 5 years?
–Have you granted mortgages on any property within the last 5 years?
A revocable trust (land trust or living trust) will not protect assets. While it can be useful for estate and tax planning, once those assets are discovered, the assets transferred to the revocable trust are not protected from creditors.
When a grantor reserves the power to take property back from the trust (as is the case in land and living trusts), the grantor’s creditors stand in the grantor’s position and can compel the grantor to re-transfer trust assets for their own benefit.
Yes, there are ways to enhance protection through a revocable trust. . . such as using multiple trusts for different assets, establishing out-of-state trusts, adding beneficiaries other than you and your spouse, etc.
But why beat out your brains?
I agree with Dr. Goldstein, who says, arm yourself with a good asset protection plan and then publicize it to potential litigants. “Make them realize that they cannot easily collect even if you do have considerable wealth and they do win their lawsuit…It makes little sense to engage in protracted litigation because the plaintiff believes you have ‘deep pockets,’ when you can stifle that enthusiasm by revealing assets fully protected from potential judgments.” See, “Asset Protection Secrets,” Goldstein, Arnold S., p. 22. (Available from amazon.com)
While I think a corporation has to fit somewhere in the asset protection plan (because of the tax and income-shifting benefits), I’ve come to the conclusion that a Limited Partnership or Limited Liability Company are the entities that put the real teeth into an asset protection plan.
(I lean more in the direction of an LP over an LLC only because LP law is very well developed and the LLC is still a newcomer. They should, in theory, operate the same way. And the points below should apply equally to an LLC.)
The real power of an LP is that the Uniform Limited Partnership Act limits a creditor’s remedy to a “charging order.” The creditor cannot seize your partnership interest or partnership property. The “charging order” gives the creditor only the right to any profit distributions from the partnership to the debtor partner. As a result, the creditor’s charging order is nearly worthless because the general partner of the LP can decide NOT to distribute profits.
And here’s the best part: Under the Tax Code, a charging order creditor automatically becomes liable for taxes due on the debtor-partner’s share of the LP’s income.
If you have a 50% share of the LP and it earns $100K, that’s still $50K of taxable income–EVEN IF IT THE INCOME HAS NOT BEEN DISTRIBUED to the partners. But now, the charging order cre