Limited liability entities such as corporations, limited partnerships or limited liability companies are often the first step to protect your personal assets from liability or creditors. But what other steps can be taken to protect your hard-earned assets from lawsuits or claims? This article addresses the use of LLC's and asset protection trusts to obtain greater protection. To evaluate and understand the alternatives, we need to first understand the difference between business and non-business claims.
The usual remedy for a creditor of a member or owner of an LLC is to obtain a charging order against that member. The charging order prevents the creditor from reaching the LLC assets. The creditor is limited to a court order charging the interest of the member/debtor so that if any distributions are made from the LLC to the member, they have to be distributed to the creditor. The creditor typically obtains only the economic rights to the distributions not the voting rights or other non-economic rights of the LLC Member. The application of the charging order in any particular case will depend on the state's statutory provisions and case law treating the charging order subject. The benefit of the charging order remedy to the owner of the LLC is that the assets within the LLC remain protected from the outright seizure by the creditor who is limited only to distributions that may not be made pursuant to the discretionary right of the manager to withhold such distributions. In other words, assets that would be otherwise attractive to a judgment creditor become much more unattractive or difficult to reach if they are held within a limited liability company where the charging order is the exclusive remedy.
A Foreign Asset Protection Trust is established in an offshore jurisdiction which has enabling trust legislation that provides substantial protection against creditors of the Trust. One of the greatest advantages of the Foreign Asset Protection Trust is the fact that by its very nature any legal attack against its assets is transferred abroad to a different legal system. Normally, a foreign trustee is necessary for the effectiveness of the Foreign Asset Protection Trust. The biggest advantage in utilizing the Foreign Asset Protection Trust is that assets can be placed offshore beyond the jurisdiction of US courts. Some of the principal advantages of the offshore trusts are as follows:
Note that foreign trust may subject to greater tax scrutiny and the potential for audit. Many federal tax returns and forms now require the disclosure of any foreign entities or interests.
The Hybrid Bridge Trust provides a unique combination of the benefits and enhanced protection provided by a Foreign Asset Protection Trust and the lower cost and flexibility of the Domestic Asset Protection Trust. This enhanced protection of the Foreign Asset Protection Trust is only triggered when actually needed. For many clients, this provides the optimum combination of lower cost and enhanced protection.
The information provided above is a general discussion of these concepts. An effective asset protection plan must be crafted to fit your specific situation including the potential risks, business operations and the nature and location of the assets to be protected. Call our office to discuss the asset protection plan that may be most appropriate to insulate you and your family.
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Goralka Law Firm serves clients throughout Sacramento, Roseville, Folsom and Elk Grove, California and the Surrounding Areas. Services provided include legal consultation and the preparation of: Revocable Living Trusts, Wills, Powers of Attorney, Living Wills, Healthcare Power of Attorney, Life Insurance Trusts, Family Limited Partnerships, Limited Liability Companies, Corporations, Charitable Trusts, Medi-Cal Planning, and Other Estate Planning and Tax Planning Strategies
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