Asset protection employs legal techniques that deter others from taking, or in some cases, attempting to take your assets. The complexity of any asset protection plan depends largely on what types of assets you have, and what type of work you do.
A typical asset protection case involves the formation of one or more entities, typically limited liability companies (LLCs), and/or irrevocable trusts. In a typical situation, an LLC is formed, in which you are the manager, and the assets that you want protected are contributed to the LLC. As the manager, you retain control over the assets in the LLC. With an irrevocable trust, you give up the ownership and control of the property transferred to the irrevocable trust.
An LLC provides liability protection for its members from liabilities generated by property owned by the LLC, and assets owned by the LLC are protected from any liability of any member. If the liability is generated by the LLC, only the assets owned by the LLC are available to the plaintiff if the lawsuit is successful. The other assets owned by the members of the LLC are not available to the plaintiff. If the liability is generated by a member of the LLC, the property owned by the LLC is protected.
A creditor of a member of an LLC cannot take the member’s interest in the LLC or assets from the LLC. A creditor is only entitled to get what is known as a charging order. This means that if any distributions are made by the LLC to the member, the creditor is entitled to those distributions until the judgment is paid in full. The charging order does not entitle the creditor to become a member of the LLC.
Corporations do provide limited liability to the officers, directors and stockholders of the company. This means that in a properly organized, maintained and capitalized corporation, the officers, directors and stockholders have no personal liability for any debts of the corporation. If the corporation loses a lawsuit, and the corporation does not have sufficient assets to satisfy a liability, a creditor cannot seek the personal assets of the officers, directors or stockholders. However, if your corporation loses a lawsuit, all of the corporate assets are available to satisfy the judgment. The stock of a corporation is not protected from a shareholder's personal liabilities. A shareholder’s stock in any corporation (closely held or publicly traded) can be used to satisfy any of the shareholder’s personal debts, obligations, judgments and liabilities.
It is important to realize that not every person will use the same asset protection structure. Designing a plan to fit your needs should take place under the guidance of an attorney who concentrates in these matters. Finally, and most importantly, your asset protection plan must be created before any claim. If you wait until there is a liability, it is probably too late.
–Matthew Adams joined Hodges & Coxe in 2010 as an associate attorney and currently practices in the areas of estate planning, estate administration, business formation and organization, business transactions, corporate law and taxation. Please contact him for advice on these issues at (910) 772-1678.