The second in a series of in-depth articles on asset-protection planning discusses domestic asset protection through the use of 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.
See if the following makes sense:
If you ask about asset protection (in many states), their answer is to put your money into life insurance and annuities.
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).
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
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
Stocks or mutual funds
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.
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.
Roccy DeFrancesco, JD, is author of
, and founder of
The Doctor's Wealth Preservation Guide
The Wealth Preservation Institute. The
as benefit for being a reader of
has recently been approved for is approved for up to 21 AMA PRA Category 1 CME Credits™. If you would like to purchase the book at a 33% discount
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Physician’s Money Digest