Asset Protection Planning
As US persons acquire more and more assets, their ultimate goal is to maintain and protect those assets — and pass their wealth down to the next generation. This is commonly referred to as generational wealth and is a priority for many people, especially those with children. In general, the world has become much more litigious over the past 10-20 years. As a result, Defendants with deep pockets have become the target of many state and federal lawsuits, including frivolous suits with no merit – hoping the deep-pocket defendant will settle the matter simply to avoid the headache. Thus, it is very important for taxpayers who have accumulated wealth to protect their assets with proper asset protection planning. Let’s take a look at a few common issues to consider when seeking to put together an asset protection plan.
Transferring Certain Assets Into an S-Corp or LLC
One of the first types of assets that US persons may acquire beyond a 401(k) or IRA is a rental property. Whether it is because they have moved into a new home but kept their old home as a rental or acquired a rental property in addition to their primary residence, the rental property is still a very common investment asset. Forming an S-Corp or LLC is one relatively simple method that provides asset protection for a taxpayer with rental real estate. That way, the asset is not individually owned by the taxpayer but is instead owned by the company. Thus, if a tenant wants to sue, then they are typically limited to filing a suit against the company and not personally against the landlord.
In addition to forming an S-Corp or LLC to protect rental property assets, a taxpayer will want to be sure that their rental property is covered by renter’s insurance. That way, the renter would have a much more difficult time trying to pierce the “corporate veil” (see below) or go after the owner’s personal property beyond what is available by way of insurance. If the rental property is not covered by any insurance, then the taxpayer’s own personal assets may be in harm’s way.
Avoid Piercing the Corporate Veil
Beyond just real estate companies, some taxpayers will create corporations, LLCs, Foundations, FLPs, etc. in order to control their investments. For example, a person may create a holding company or other entity for the sole purpose of investing and managing passive assets and investments. It is important for the owner to create a distinct boundary between personal ownership and the corporation. Otherwise, if the owner of the company commingles personal assets and corporate assets, a court could determine that the owner has muddied the waters enough so that when a Plaintiff files suit against the owner, they are allowed to pierce the corporate veil and go after the owner’s personal, non-corporate assets.
One way to protect assets is by creating an irrevocable trust. With an irrevocable trust, the grantor/settlor relinquishes several rights to the trust sufficiently to the point that they are no longer considered the owner or in control of the trust. As a result, if the person who created the trust no longer owns the assets, then if that person was sued, the assets in a separate irrevocable trust could be off limits. Irrevocable trusts are very complicated, and while they are technically irrevocable, several rules, exceptions, and exclusions can allow the previous owner of the assets in the trust to benefit from the trust. Still, in general, an irrevocable trust is very difficult to unwind, so it is an important consideration before creating one.
Offshore and Domestic Asset Protection Trusts
One very common type of irrevocable trust that is used to protect assets is an asset protection trust. The Offshore Asset Protection Trust is common in countries such as Nevis and the Cook Islands. In addition, Domestic Asset Protection Trusts are available in some states as well. One of the most important aspects of any asset protection trust is timing. More specifically, the trust should be created before there is a creditor coming after a specific asset – because if the person waits to create the trust until after a creditor is already on their tail, they may find themselves in a fraudulent conveyance scenario and more likely than not, the court could unwind the trust.
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