When families come into my office to discuss their estate planning and legacy planning legal strategy, rarely do they consider the topic of asset protection planning. In fact, many families that I speak with do not think they are wealthy enough (whatever that term means) to consider asset protection planning. However, what is asset protection planning and when is it needed?
At its core, asset protection planning is the process of reducing your financial portfolio so as to discourage lawsuits. A simple fact about litigation and lawsuits are that if there is a small chance of recovery due to the defendant not having sufficient assets, the chances of lawsuits are decreased. Most people do not hire an attorney for the purpose of suing someone or a business based on “principal” when there is little or no chance of recovery.
Listed below are some of the many different types of assets that I routinely see inappropriately titled with zero to no asset protection strategy in place:
Plain and simple, real estate assets need to be protected. This is not just having the correct amount of insurance to cover the property, but to have a Limited Liability Company or a Family Limited Partnership as well. In addition, jointly owned real estate should generally not be held as individuals or in General Partnerships. There is tremendous liability potential. You MUST consider LLCs or FLPs!
Consider the following. You own a piece of real estate that you are renting out to a tenant. Due to your careless error, you forget to salt the sidewalk before an expected snowfall that is reported to hit the area overnight. The following morning, your tenant walks out of the home and slips and falls on the steps breaking his wrist and arm. Suddenly you are served with a letter threatening a lawsuit by an attorney representing your tenant. At this point, you call your insurance company and turn the claim into your insurance company. You are not too worried, because this is why you have insurance on your rental properties. Suddenly, you receive a notice in the mail that your insurance company is denying the claim! You are absolutely stunned! You call your insurance company and discover that they are denying the claim due to repeated complaints by your tenant to address this problem, and you never addressed the problem. Therefore, under the insurance contract, the insurance company is denying the claim.
You are forced to hire your own attorney to defend the claim. At the end of the day, you end up having to pay your former tenant $150,000 for his injuries and lost wages. In order to pay, you are forced to access your retirement account and pay this claim.
This story is all too familiar and routinely happens to good families who simply purchased real estate just as a small-time investment.
Engaging in an Asset Protection Strategy Which Includes Either an LLC or an FLP Can Alleviate the Liability Exposure When it Comes to Real Estate. Had the Property Owner in the Story Above Owned His Property in an LLC or an FLP, Only the Assets of that LLC or FLP Would be Subject to Loss from the Lawsuit. In Many Cases, This Would Just Be the Real Estate and a Small Bank Account. In Many Circumstances, Seeing the Limited Financial Portfolio for Recovery Can Deter Lawsuits!
All too often, my business owner clients have their planning and assets structured completely improperly. Many times, they are unnecessarily exposed to liability. Many business owners feel that they just need an LLC or they just need a corporation, and everything is complete when it comes to their business structure and asset protection structure. However, just having a corporation or just having an LLC is never enough.
When it comes to proper business structure, real estate assets should be held in an LLC and leased to the business. In addition, any business equipment could be held in the LLC and also leased to the business. The key to proper business structure is to maintain separate liability protected entities for different business functions and operations.
The same is true when it comes to real estate holdings for real property investors. If a real property investor owns multiple properties, he or she should not hold them all in a single LLC, but rather a series of LLCs. Holding all properties in a single LLC is the same as having all of your eggs in one basket.
What If Your LLC Is Sued?
The added benefit when it comes to engaging in asset protection for real estate, investment assets, or even your proper business structure is the remedy that a creditor would have who sued your LLC. It is called the charging order.
When your LLC is sued, the creditor cannot reach the partnership assets or seize the partnership interest or the LLC interest. The creditor is limited to a court order charging the interest with the debt. If distributions are made to the individual member of the LLC with respect to that charged interest, then those distributions must be made to the creditor.
It can result in added protection for the LLC assets from creditors when the exclusive remedy is the charging order and not foreclosure.
Domestic Asset Protection Trust
What if you do not own a business and do not own any additional pieces of real estate, how do you protect your assets. Just because you do not own a business or own real estate does not mean you do not have to protect your assets from loss. One option is the Domestic Asset Protection Trust. Many states have these type of trusts, but in Tennessee we call them the Tennessee Investment Services Trust (or TIST for short). A Tennessee Investment Services Trust is nearly completely impenetrable to creditors when set up correctly. In order to have a valid TIST, the following requirements must be established:
- Appoint a third-party trustee to take legal title of the assets
- Name successor beneficiaries
- Set out the general terms for the investment, management, and distribution of the assets
- Execute an affidavit stating that the transfer of the assets will not render you insolvent, that you are not intending to defraud any creditor, there are no pending legal actions against you, and you do not contemplate filing bankruptcy.
When these requirements are followed, subject to certain time limits for notice to creditors, the assets of the trust are protected from creditors (except for child support orders).
When it comes to asset protection, you can never be too careful. If it is time to review your estate and legacy planning to include an asset protection strategy, please contact our office for an Asset Protection Planning Strategy Session and Legal Audit.
Contact us at (6150 490-0477 or Fill Out the Contact Form on this Page and We Will Schedule You For Your Free Asset Protection Planning Strategy Session and Legal Audit!