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Chris Jones: How to Achieve Total Asset Protection

Life is full of risks. We may get sued because of the activities we engage in, what we own or even who we know. Virtually every aspect of life can be the source of creditor’s claims, litigation and judgments.

Being alive is risky business! You have worked hard to accumulate your assets, now how can you protect them for yourselves and your heirs? Is it really possible to have total asset protection?

This article is intended to describe the tools that can offer near, if not complete, protection from life’s legal risks.

Trusts

A creditor may reach a beneficiary’s interest in a trust only by first obtaining a court order. The creditor must first petition the court for such an order. Without a trust, the first time you learn of the creditor’s action is after the property has been seized.

If the trust document includes a “spendthrift” clause, which states that the beneficiary’s income or principal is not subject to voluntary or involuntary transfer, the beneficiary’s interest is protected from creditors. Unless trust assets are actually transferred to the beneficiary, those assets are exempt. If creditors are waiting that may never happen.

Where trusts can be especially effective is in protecting your children. By keeping assets in trust, your children’s creditors or disgruntled spouses cannot reach those assets.

If you use a trust for creditor protection, be sure to include both a “spendthrift” clause and language that the trustee has the discretion to determine when any payments will be made to beneficiaries.

Family Limited Partnerships

Typically, family partnerships can own real estate, stocks and cash. The individual partners, which are usually you and your family members, do not own the partnership assets. Rather, you only own interest in the partnership.

This means that limited partnership assets are not liable for a money judgment rendered against any partner debtor personally. As with trusts, the creditor must obtain a court order charging a partnership with the amount of the judgment.

Family limited partnerships are especially effective because the limited partners (typically your children) do not have any discretion over when the payments and distributions are made to individual partners. Even if the creditor has obtained a court order, the creditor must wait to receive the distribution from the partnership. Only the general partner (usually you) decides when and how much that distribution will be.

A judgment creditor who obtains a court order is “taxed” on the debtor’s share of partnership income, even when the income is not distributed to the judgment creditor. This means that the judgment creditor can end up paying income taxes on partnership income that they have never received.

Corporations and Limited Liability Companies

Corporations and limited liability companies are separate legal entities existing under authority granted by state law. They have their own identity, separate and distinct from the persons who created them and from their members or shareholders.

As separate legal entities, they have the power to contract, to own and convey property, to sue and be sued.

As separate legal entities, corporations and limited liability companies are responsible for their own debts. Normally, the shareholders, directors and officers are not legally responsible for corporate liabilities.

If you operate a business as a sole proprietorship or partnership, all of your assets are subject to the business’ liabilities. By operating your business as a corporation or limited liability company, you protect all nonbusiness assets from the business’ liabilities. If the worst happens, all that you lose are the assets owned by the business entity itself.

Take Action Now

The time to plan for protection from creditors is before any judgments are entered against you. Once a creditor obtains a judgment, you are restricted as to transfers of property out of your name. There is a danger that the creditor will claim that the transfer was for less than fair-market value and is therefore fraudulent. Such transfers are subject to being set aside.

It is therefore better to use the tools to protect your assets before the damage is done. Using the right tools for total asset protection will preserve more of your estate for both you and your heirs.

Chris Jones is an attorney at Rogers, Sheffield & Campbell LLP, a Santa Barbara law firm. Click here to read previous columns. The opinions expressed are his own. This article is not intended to provide legal advice. For legal advice on any of the information in this post, click here for the form or phone number on the Rogers, Sheffield & Campbell Contact Us page.

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