Domestic Asset Protection: Using LLCs and FLPs

This is the second in a series of in-depth articles on asset-protection planning.

protection comes in many flavors. You will get a different answer to your asset-protection questions depending on whom you talk with.

Domestic asset

See if the following makes sense:

insurance agents

If you ask about asset protection (in many states), their answer is to put your money into life insurance and annuities.

pension consultants

If you ask about asset protection, their answer is to put as much money as possible in an ERISA qualified plan.

CPA/accountant or attorney

If you ask the typical about asset protection (as a general statement), they will tell you that they don’t really understand the question.

Domestic asset protection is a very diverse topic that virtually no one educates on today. As a general statement, domestic asset protection revolves around the use of family limited partnerships (FLPs) and limited liability companies (LLCs).

C- and S-corporations aren’t used because of the remedy a creditor can obtain when asking a judge to make a debtor pay off a judgment or settlement.

If assets are owned by a properly setup LLC or FLP, a creditor asking the courts to turn over those assets to the creditor can only obtain a “charging order” from the court (i.e. the court can’t invade the LLC or FLP and give those assets to the creditor).

Charging order

There are three things that a creditor cannot get with the charging order:

1. A charging order does not transfer the interest in the LLC to the creditor or force the debtor to sell his/her interest and turn over the sale proceeds to the creditor.

2. A creditor cannot force the LLC to sell assets.

3. A creditor cannot force an LLC to distribute income.

But the creditor will have

to pay income taxes on income generated in the LLC or FLP that are not distributed. A revenue ruling issued in 1977 (77-173) states that a creditor who obtains a charging order can be treated as a partner for federal income tax purposes.

With an S- or C-corporation

If the

assets are owned by an individual or by a C- or S-corporation, then the judge can direct the debtor (the loser of a lawsuit) to hand over assets in his or her own name directly to the creditor. In that case there is no asset protection.

The judge can also order:

1) You liquidate your interest and give the proceeds to the creditor.

2) You transfer your interest in the C- or S-corporation to the creditor.

3) You let the creditor vote your interest in the company.

when trying to protect personal assets such as:

Basically, a C- or S-corporation is not a good tool

Family home or condominium

Rental property

Non-rental property

IRA

Stocks or mutual funds

Life insurance

Bank account or CDs

Planes, boats, automobiles, wave runners or motorcycles

Other business entities (especially S- or C-corporation stock)

Any other collectible items that have value

If you have anything of wealth that you own in your own name (or that of your spouse or co-owned with your spouse), it is at risk from creditors.

Summary

More than 90% of the doctors in this country have not correctly protected their assets. While the topics of domestic asset protection merit 50-plus pages, the above is a quick little summary of the bread-and-butter asset-protection tool (an FLP or LLC).

While an FLP or LLC is not a magic pill to be used as a cure-all, it is the foundation for any domestic asset-protection plan and something that can start all clients on their way to protecting themselves from business creditors and personal creditors.

Intro | Part 2 |

Read more:

LLCs Aren’t Bulletproof

Roccy DeFrancesco, JD, is author of

, and founder of

The Doctor's Wealth Preservation Guide

The Wealth Preservation Institute. The

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