In many states, a creditor is permitted to "foreclose" on a partnership or LLC interest. A "foreclosure" is a seizure of the debtor's interest and that is a very powerful weapon for the plaintiff. An LLC can be useful within the context of a larger plan. But, every plan which involves an LLC must protect ownership interests with a trust designed for that purpose.
A recent case in the U.S. Bankruptcy Court affirmed that a creditor of a single member LLC would have rights beyond the charging order remedy, Since there was no other member to protect, there was no reason to limit the ability of a creditor to reach the assets of the LLC.
As a result, to protect the assets of a particular LLC against outside liabilities, there must be more than one legal owner of a membership interest in an LLC. For those who need single member status for income tax purposes, a Grantor Trust may be designated as the second member.
Stated again for emphasis, the LLC interests should not be held directly by one individual. For those in high liability businesses or who have significant wealth, the interests should be owned by a trust to protect against a potential charging order or foreclosure or even from an argument that the entity is the "alter ego" of the founder. You cannot gamble with the effectiveness of an asset protection plan. The only viable strategy is a specially designed trust arrangement to provide sufficient "distance" between you and the LLC assets. You must insure that the plan is able to withstand whatever degree of scrutiny is ultimately applied.
Public opinion, policy and the law in general is now favorable to asset protection planning as long as the planning is not intended to defraud creditors or violate existing laws against Fraudulent Transfers.
Based on these new laws and advances in technique, trusts can be designed which combine the best features of domestic and offshore arrangements within a single trust. All of your assets can be held within the trust--but governed by special terms appropriate for that asset.
For example, your trust may be designed to hold your home, interests in an LLC, accounts receivable, and your savings and brokerage accounts. This trust should contain specific language to:
1. Protect the residence while preserving the tax benefits associated with the home (mortgage interest, property taxes, avoidance of gain in sale;
2. Protect the LLC (or FLP) interests from charging order or foreclosure;
3. Protect the accounts receivable or other business assets with an equity strippng strategy;
4. Protect the savings and brokerage accounts with one of many available options-depending upon your current and anticipated needs and liability concerns;
5. Create the degree of privacy that you wish to accomplish; and
6. Provide the traditional estate planning features of a living trust as well as advanced estate tax savings measures if needed.
An additional feature which may be valuable permits a migration of the trust to a more favorable jurisdiction - domestic or foreign-when and if necessary. In the right situation, this provision can be used to force any future plaintiff to proceed with a lawsuit against you in a string of unfriendly foreign jurisdictions to which the trust has continuously migrated. For example, under normal circumstances, the trust exists and is governed by whatever domestic law we choose. But, if circumstances warrant, we can convert all or a portion of the trust or it's assets into an offshore trust or LLC, legally protected and effectively out of reach. A plaintiff attempting to litigate in a foreign country, such as the Cook Islands would be faced with nearly impossible hurdles, subject only to local Fraudulent Transfer rules and the applicable Statutes of Limitations.
The approach is to hold all financial accounts within a Privacy Trust. This legal arrangement prevents the acquiring of any useful personal information. The Privacy Trust acts as an intermediary to remove the connection between you and the account. Neither your name, nor your Social Security number, nor any other personal identifying information appears in any records related to your account. No employees of the firm are aware of your relationship to the account, and the bank can't sell information that it doesn't have. That's the proper model for creating financial privacy.
Information about your real estate assets and your other property can also be shielded from public disclosure. Since these records are publicly recorded and can be gathered through a database search—privacy means severing the connection between you and the property. When the records are searched under your name or identifying information, you do not want your home and other properties to appear on the list. If you hold real estate in an LLC, your ownership of these entities must be concealed as part of any privacy strategy. Locating your property and determining its value is the easiest and most popular technique for measuring your attractiveness as a potential target for litigation or any other type of claim.
The Privacy Trust can be created in a simple and straightforward manner to accomplish most privacy, asset protection, and estate planning objectives. Progressive levels of sophistication can be added as the complexity of the financial circumstances increase. Advanced planning strategies may include a variety of domestic or offshore options, depending upon the particular results to be accomplished.
The feature that creates the ability to achieve privacy for these assets is the use of a special type of corporate trustee—whose duties are to carry out your instructions. The corporate trustee does not invest or manage trust assets. His role is strictly limited to acting as your agent and nominee and executing documents as you request.
This role differs significantly from that of a typical trustee. The responsibilities are, likewise, dissimilar from the traditional responsibilities assumed by a trustee. Most trust companies are in business to manage assets—and they charge substantial fees for performing these services. The company makes investment decisions for the trust and distributes funds according to the terms of the trust agreement. Specific requests by the settlor or the beneficiaries must be reviewed by trust officers and their counsel to make sure that legal responsibilities and fiduciary duties are satisfied. Within this bureaucratic structure, even relatively simple matters are time consuming and expensive to accomplish.
Those who create a Privacy Trust generally want to maintain control and authority over their property—while using the trust company only for the limited purpose of holding legal title and executing necessary documents as instructed. The requirements for the trust company are:
1. It must be adequately capitalized and bonded to assure the safety of trust assets.
2. It must be licensed and regulated by state banking authorities.
3. Trust officers at the company must have authority to respond quickly and efficiently to all instructions from the settlor.
When the proper precautions are taken to guarantee the safety of the property and we are satisfied that the trust company will carry out directions in a timely manner, the Privacy Trust can be created.
Another way adds the asset protection benefits to the plan which we have just described. When we supplement the trust with an entity such as a corporation, Family Limited Partnership, or Limited Liability Company, we can insulate and shield assets from the risks of potential liability. Rather than holding property directly in the trust, we hold assets within entities that are designed to accomplish asset protection purposes. The interests in those entities are owned by the trust.
Here's an illustration of a typical plan. Our client, Henry, is married with three small children. He owns a dry cleaning business and a four-unit apartment building. These assets represent his lifetime savings. Henry and his wife want a plan to achieve three major goals:
1. Privacy—An important goal is anonymous ownership of the business and the real estate. During the previous ten years, Henry has been named in six frivolous lawsuits from customers, employees, and tenants. Although he won in court each time, the legal fees and the worry associated with the litigation have taken a financial and emotional toll.
2. Protecting Family Savings—The business and the real estate are both Dangerous Assets. A liability produced by either could wipe out all of the equity in the other. Henry wants a plan to ensure that if something goes wrong with the business or the property, he will not lose all of his savings.
3. Estate Planning—Avoiding probate, minimizing taxes, and providing for the care and support of his minor children are the remaining objectives of Henry's overall plan.
Each of Henry's concerns can be addressed within the convenient strategy of the Privacy Trust–Plan #2.
We transferred the dry cleaning business into a Limited Liability Company (LLC #1) and gave the trust 100 percent of the interests in the LLC. Henry's name no longer appears as the owner. Licenses and permits are in the name of the company, and the public filing shows that the LLC is the owner of the business. The Articles of Organization for the LLC list the name of the trust—but not Henry's name. The same plan was followed for the apartment building. A deed transferred title to the apartment building into LLC #2. Anyone attempting to discern the owner of the LLC would find only the name of the trust. Important privacy goals have been achieved.
This strategy also provides a high level of asset protection. The LLC creates a legal shield, which protects each asset from a liability generated by the other. Henry can operate the dry cleaning business in LLC #1 without concern about being named in a lawsuit and without jeopardizing the apartment building. Similarly, liability from the property will be contained in LLC #2 without risk to the business.
Additional protection is furnished because a judgment creditor cannot seize the assets of either LLC. If there is a lawsuit against Henry for an unexpected reason, the business and the real estate—secure in the LLCs—are insulated from the claim. Although the membership interests held by the trust are subject to a charging order, this remedy is generally not effective and is unlikely to be pursued by a plaintiff.
A variety of estate planning features are easily integrated into this plan. The Privacy Trust has provisions that allow Henry's wife to continue the management of the family assets if something happens to Henry. Guardians and successor trustees are named to act on behalf of the children if both parents should die. Probate is avoided, estate taxes are minimized, and the proper structure is in place to provide for the survivors.
If Henry had liquid savings in a bank or brokerage account, we would add a third LLC as the owner of the account. The ownership of the LLC would be placed in the trust. As we discussed, when our goal is privacy and asset protection we attach an asset protection vehicle—such as an LLC to the plan.
All financial accounts require the name and identifying information for the authorized signatory. Although the account is in the name of the LLC, we will need to provide a signatory. If Henry uses his name and Social Security number, the account will be disclosed in a search. The proper strategy is to have the trust company act as signatory. Henry can manage the investments and even make trades in the brokerage account. The trust company issues checks according to Henry's instructions.
With the Privacy Trust–Plan #2, the account is both private and protected. The account is in the LLC and Henry is not connected to it in the public filings or on the signature card. His ownership of the account won't be discovered through any available search techniques. If a lawsuit or a claim develops against Henry for any reason, the funds are legally insulated against liens or collection actions in the LLC
Information about your financial life is a valuable commodity. With limited exceptions, public and private entities that have information about you use it to market products or sell it to others who do the marketing. County and state governments sell real estate ownership data, driving records, and court filings to list vendors and information brokers. Financial firms use sophisticated software to analyze your saving and spending patterns and target investment products you are likely to buy.
As a result, information about your real estate ownership is directly available for public view and financial accounts are immediately accessible by hundreds or hundreds of thousands of company employees and hired sales forces. From there, it is only a small step into the hands of a lawyer, business competitor, or a determined ex-spouse—armed and eager to use this information for personal advantage.
Since we cannot control the flow of personal information from the bank or brokerage firm, our approach is to restrict access in the first instance. If your name or identification number is on the record, you have provided valuable information about yourself that is subject to widespread dissemination. Instead, we recommend that you limit access to your ownership records and details by using a Privacy Trust to hold property and financial accounts.
A Privacy Trust can be created solely for the legitimate purpose of concealing the ownership of assets from public view in order to avoid privacy intrusions. This is often an important part of a sound plan for both business and personal reasons. The Privacy Trust–Plan #1 is designed to directly own your home and savings accounts, and to provide a convenient and cost effective strategy to accomplish privacy goals.
The Privacy Trust–Plan #2 is designed to add particular asset protection features to the overall plan. Property may be owned by an asset protection vehicle such as a corporation, Family Limited Partnership, or Limited Liability Company to shield Dangerous Assets from each other and from Safe Assets. The ownership of the entity is then held by the Privacy Trust.