If you don’t know what would happen to your assets if you lost a lawsuit or if this life was suddenly cut short, then you’re not doing all you can to safeguard the resources allocated to you. So, remember that placing your assets in the proper legal tools instead of your own name, in most cases, can be your best start on your road to financial security.
Indeed, using various legal tools to shield yourself from legal threats is an important part of asset management. You should know how to protect your assets. Then, ideally, put a plan in place before legal threats occur, so you want to act quickly when planning to secure your assets. Not only can you use legal tools to protect yourself and your business from legal threats in the present, but you can also use legal tools to protect those that you will inherit in the future as well as those people who will inherit assets from you. With the proper legal tools in place, you can make sure that your assets are not only protected, but also safe in the hands of the future generations that you designate.
Living Trusts
Forming a living trust to hold one’s assets can assist the individual both while that person is living and after they are deceased. A trust consists of at least one grantor (also known as “settlor”), who has the trust established; at least one trustee, who manages the trust; and one or more beneficiaries who derive the benefits of the trust. During an individual’s lifetime, he or she can create a living trust, which works to move ownership of property and other assets out of his or her name and into the trust. The assets are managed through the trust document and then at a specified point, are typically transferred to one or more designated beneficiaries, usually upon the death of the settlor(s). There are a different types of living trusts that an individual can select, and each type of trust is established depending on the needs of the parties.
- Revocable Trust. This type of trust focuses on managing the grantor’s property both during his or her life and after his or her death. With this type of trust, the grantor can change or revoke the trust if he or she chooses. While this type of trust gives the grantor much power and control, it does possess one huge drawback: there is little to no asset protection from creditors. This is because the grantor keeps control over the trust. A general premise in trust law is that whatever the grantor could do, the one with a judgment against him or her could step into his or her shoes and do the same. So, if the grantor has the full power to withdraw all funds at once or change the beneficiary, the creditor could withdraw all the funds and once or change the beneficiary to himself.
- Irrevocable Trust. With this type of trust, amendments cannot be readily made. Thus, upon the death of the grantor, trust assets are typically made available to the beneficiaries of the trust. The grantor does not officially own the property, if established and operated properly, it can provide substantial protection from both litigation and creditors. Furthermore, this type of trust can be established as to shield assets so that Medicaid can cover costs in case of illness or personal injury. There are a number of factors that are required, in addition to being drafted properly, in order for the last two benefits to be enjoyed. One, is that it must be established in the proper jurisdiction where these benefits are available. For example some jurisdictions do not allow this type of trust to provide asset protection if the settlor and beneficiary is the same person. Others do. Another is that the trustee needs to be a truly independent third party. It cannot be the settlor, his or her agent, lineal relative, agent or controlled employee.
Either of the above trust subcategories can significantly reduce estate taxes when established properly. They can also be used to provide for educational expenses, medical expenses, living expense and/or a steady income to trust beneficiaries.
Land Trusts
Land trusts offer another wonderful option. They are used to provide privacy of ownership of real estate. In this type of trust, the trustee keeps property titles so that another party, the beneficiary, is the beneficial owner, but can keep out of the public eye. The individual in charge of making the trust (the settlor) is often the original property titleholder before the property is transferred into the trust, and usually designated as the trust beneficiary. Thus, the beneficiary typically manages (or directs the trustee) of this type of trust, while the trustee holds the property’s title. The trustee is often a trusted friend or relative or a corporation or LLC that the settlor owns privately. Nominee officers/directors/managers for the company can be filed in the public records to further enhance privacy.
With this arrangement, since the beneficiary retains the ability to manage the trustee, the beneficiary can live in the property and/or collect the income from the trust. The working relationship governing the trustee and beneficiary is managed by the trust agreement. Therefore, the power the trustee retains over the trust is usually governed by the beneficiary as dictated by the trust. The trustee generally acts as a figurehead in order to protect the privacy of the true owner.
A land trust is usually a revocable trust, so the trustor may amend it during his or her lifetime, and retains the right to remove a trustee. The trustee simply holds title as a fiduciary and there is little to no liability for the trustee. So, the trustee is protected from liability if there is liability associated with the property.
Title Holding Trust
Title trusts work like land trusts, but are used for personal property, as opposed to real estate. With this type of trust, the owner of personal property, such as an automobile, a mobile home or a piece of valuable equipment, can transfer the ownership of the property in the trust for privacy of ownership.
This can help you prevent lawsuits because when a contingent fee lawyer does an asset search there will be little to nothing to find. The assets will be titled in the trust name instead of your name, personally. If you own an expensive home and a fancy car in your name a simple car title search will easily reveal this to the salivating attorney. “You don’t have to pay me anything. I’ll just take 30% of what we can get,” will be the attorney’s reply to the dreamy-eyed factory worker who you just rear-ended.
It is easy to quickly slap a lis pendens on each piece of real estate, each car and each piece of expensive equipment that shows up the public records. Holding real estate in land trusts and publicly listed personal property in title holding trust keeps the property ownership away from prying eyes.
Lawsuits can hound a person of means because what he or she owns usually shows up in a series of public records searches. However, when the property is held in trusts that provide a privacy shield, the odds of getting sued can diminish, putting the odds more squarely in your favor. Land trust and title holding trusts are privacy devices, not asset protection tools. They do, however, camouflage your ownership. Not only do they shield your assets from potential litigants and snoopy associates, they also put up a series of hoops a litigant must jump through in order to take what is yours.
Asset Protection Trusts
One of the most powerful tools to shield yourself from threats is to utilize an asset protection trust. By using this type of trust, you will be able to shift some of your assets into a trust that is managed by an independent trustee. This transfer can place the assets located in the trust away from the hands of creditors. Depending on the jurisdiction, you will also be able to benefit, if you wish, by taking distributions from the trust. These trusts can also be useful in that they can even offer you protection for your children if you find that they need it, either now, or in the future when your days are done.
An asset protection trust must meet certain requirements to allow you to obtain the benefits mentioned above. First, the asset protection trust itself needs to be formed as an irrevocable trust. Second, you need to appoint an independent trustee, which can be a person, bank or trust company. They cannot be a lineal relative, controlled employee, or agent of yours. Third, the trustee must follow the guidelines of the trust when making distributions. Fourth, the trust needs to include a spendthrift clause. A spendthrift clause prevents creditors from attaching the interest of the beneficiary in the trust before the cash or property is actually distributed to him or her. Fifth, if the trust is formed in the USA, the assets found in the trust need to mostly be located in the state in which the trust was formed. Last, if a US asset protection trust is used, the documentation and administration performed by the trust must be found in the same state.
That being said, nothing compares to an offshore asset protection trust in jurisdictions such as the Cook Islands, Nevis and Belize. Experience has shown that since US-based trusts are subject to US court orders, those court orders are increasingly favoring the plaintiffs. When the trust is in a jurisdiction such as the Cook Islands, the local courts do not have jurisdiction over the foreign trustee, so the hands or the local judiciary are largely tied. Over forty years of immersion in this industry has shown that the advent of the offshore trust has outshined other strategies and has proven to be the most powerful asset protection tool to protect liquid assets. If additional inquires on the subject are desired there are numbers as well as forms on this page in order to seek support.
Limited Liability Company (LLC)
A limited liability company (LLC) can help you protect your assets because, with this tool, you are forming an entity with special legislation, that provides a barrier and a fortress between the company and its owners. Because of the separation, the individual owners (called “members”) wind up with limited liability protection from threats. For example, if a detrimental situation occurs where the LLC cannot pay its debts, the LLC’s creditors can only access the bank account and other assets owned by the LLC. However, the personal assets of each LLC member are not subject to being seized by creditors because owners’ assets are separate from the assets of the LLC. Therefore, an owner of an LLC only risks the money he or she has invested in the business.
Naturally, personally guaranteed debts and unpaid payroll taxes are still personal liabilities for LLC principles. Additionally, if an LLC member uses the company to engage in fraudulent activity, his or she may have personal liability.
Not only can the LLC protect the owners if the company is sued. The assets in the company can be shielded from seizure if one of the of the members is sued. The maximum that a creditor could obtain would be a charging order against the LLC but legal provisions hinder the creditor from taking LLC assets or forcing the LLC to distribute income.
Limited Partnerships
In a limited partnership (LP), the owners have created a partnership consisting of one or more general partners (who control the LP) and one or more limited partners (who are passive investors). Therefore, the business is owned by at least two people and a partnership agreement can allow for significant financial freedom. The LP can typically invest in real estate, stock, precious metals, businesses, other companies and a plethora of other options. The partnership can also provide significant asset protection for each partner.
With an LP, the general partner manages the business and is exposed to liabilities incurred by the business. The limited partner is protected from liability but does not manage the business. Thus, in this particular setup, if a business owner is not bothered by giving up management and prefers to have protection from liability, becoming the limited partner can help shield him or her from threats.
LLC asset protection statutes were patterned after LPs. So the charging order protection mentioned above for the LLC also applies to the LP.
Annuities
Annuities are often exempt from federal bankruptcy law, but their financial returns are usually abysmal and the ability to access the principle again is forever lost. Annuity contracts and life insurance policies that include certain assets are protected from bankruptcy. Other exemptions also exist under federal law when annuities are paid out because of illness, death, disability, the length of service, or age. The exemption usually applies if the annuity is required to help support the debtor, but they can be limited.
However, when an annuity is located in a retirement account, there is an increased amount of protection from federal government interference. Placing a retirement plan or annuity under a plan that is covered by the federal ERISA law ensures a large amount of asset protection from both creditors and other threats. Thus, placing an annuity into a particular type of retirement fund can greatly increase your ability to protect your assets. A big drawback is that the amounts that can be contributed annually are severely limited. So, there are much more favorable and flexible options such as the offshore asset protection trust.
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