The Use of LLCs and FLPs
"Domestic" asset protection is protection that is not done offshore. 99% of people who have wealth need to have asset protection. Generally, domestic asset protection occurs with the use of family limited partnerships (FLPs) and limited liability companies (LLCs). If you feel that you need this type of asset protection, keep reading to find out more.
This type of asset protection comes in different varieties. Because of that, you'll be given a different answer to your asset protection questions based on who you talk to.
Insurance agents will tell you to put your money into annuities and insurance.
Pension consultants recommend to have an ERISA qualified plan and put as much money as you can in it.
Ordinary Accountants/CPAs or an attorney may not really know what you're asking.
OUR firm will have a different approach. We start by asking you questions and understanding your assets and your goals. A detailed summary of your problems and solutions will be given to you to see what is the best for you.
Since domestic asset protection is very diverse, not many people are educated on it, but we are.
Why Not a C- or S-Corporation?
This is 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 who is asking the courts to have those assets turned over 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).
What a Creditor Cannot Get With a Charging Order?
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.
A creditor cannot force the LLC to sell assets.
A creditor cannot force an LLC to distribute income.
What Does a Creditor Get With a Charging Order?
The right to pay income taxes on income generated in the LLC or FLP but NOT distributed.
There was a revenue ruling issued in 1977 (77-173) which states that a creditor who obtains a charging order can be treated as a partner for federal income tax purposes.
What if Assets are Owned by an Individual or by a C- or S-Corporation?
The judge can direct the debtor (the loser of a lawsuit) to hand over assets in their own name directly to the creditor (i.e., no asset protection).
With an S- or C-Corporation the judge can:
Make you liquidate your interest and give the proceeds to the creditor.
Make you transfer your interest in the C- or S-Corporation to the creditor.
Let the creditor vote your interest in the company.
Basically, a C- or S-Corporation is NOT a good tool when trying to protect personal assets such as:
Family Home or Condominium
Stocks or Mutual Funds
Bank Account or CDs
Planes, Boats, Automobiles, Wave Runners or Motorcycles
Other business entity (especially S- or C-Corp 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.
99%+ of the people with money in this country are not asset protected correctly.
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.
To get started with asset protection contact our office at 870-275-4304 or book an appointment here.
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