Tip #1 – Hold property in an entity; a Limited Liability Company or a Corporation.
A business entity such as a limited liability company (LLC) or corporation, properly established and administered, will help shield your assets from lawsuits or claims made against those businesses. It is important to keep in mind, however, that a LLC or corporation is not a silver bullet, and the entity may not ultimately protect your assets if not properly administered. See Tip #5 below.
Tip #2 – NEVER enter into a General Partnership.
Under Louisiana law, if you enter into a mutual business arrangement with another person, and that arrangement is not in the form of a business entity, such as an LLC or corporation, then your arrangement will be classified as a “state law partnership”. A state law partnership is dangerous because potentially ALL your assets, including all of your business assets, will be subject to seizure for the misdeeds, errors, or omissions of your “partner.” This is true even though you may not have entered into a “partnership agreement” because the Louisiana law pertaining to partnerships will apply by default.
For example, if your “partner” makes a short drive to an office supply store during the workday, and he gets into an automobile accident killing another person, then not only will the assets of the “partnership” be subject to seizure, but also potentially all of your property will be subject to seizure, including your home. This is true even though you did nothing wrong, and had nothing to do with the accident. A partnership provides no asset protection whatsoever, and actually puts you in a worse position (in terms of asset protection) than if you did not have a partner.
Tip #3 – Subdivide property holdings into separate entities.
It is a good idea to place each discrete property into its own separate business entity; a separate LLC or corporation. For example, if you have 5 rental properties, it would be best to put each separate property into 5 separate LLCs, thereby potentially shielding each property from liabilities occurring on or with respect to the others.
Tip #4 – Always consider the tax impact of any asset protection plan.
All assets that tend to appreciate in value (such are real estate or securities) should be kept out entities classified as corporations (S corporations and C corporations). This is due to the potential “exit tax” on the liquidations of such entities. Rather, appreciating assets should be kept in limited liability companies (LLCs). Accordingly, your asset protection advisor should also be a tax specialist, because your asset protection plan must not only protect your assets, but be tax-efficient as well. Never rely on a complex asset protection plan drafted by an advisor who is not also well versed in state and federal tax law.
Tip #5 – Respect the entity structure and keep adequate records.
Creating a LLC or corporation for asset protection, but failing to respect the entity as a separate legal person invites disaster. A judge or jury is free to “pierce the corporate veil” (or “LLC veil”) if you do such things as (1) fail to create a separate bank account for the entity; (2) treat the entity’s bank account or assets as your own; (3) fail to maintain separate books and records of the entity; (4) fail to periodically make entity resolutions; or (5) otherwise fail to distinguish yourself from the entity.
Tip #6 – Carry adequate insurance.
All of the other asset protection techniques are no substitute for carrying adequate insurance. In fact, a judge or jury may be more likely to “pierce the corporate veil” if an entity fails to carry some liability insurance. The other major types of insurance that should be considered are property, automobile, business interruption, workers compensation, and employment practices insurance. Liability insurance will protect your assets in cases where someone is injured, sustains property damage, or sues your business. Property insurance protects your business property, both real and personal, against loss from fire, theft, or other similar hazards.
Tip #7 – Dilute your ownership such that you do not have total control over the entity.
If you have 100% ownership and control of the entity, and you are sued, it is more likely that 100% of the entity will subject to a judgment. To prevent this, consider sharing ownership of the entity with a close relative on whom you rely. Any judgment will likely affect only one of you, thereby shielding the other portion of the entity from seizure. This can make a potential judgment against your ownership interest much less attractive and discourages lawsuits.
Tip #8 – If you have one or more partners or co-owners of your business, you should jointly enter into a buy-sell agreement.
Co-owners of a business need a buy-sell agreement. There is no excuse for not having one. If you are a co-owner, and you die, how will your spouse and/or children be treated after you are gone by the other owner? Consider that your heirs may be locked out of participation in the business altogether, depending upon the terms of the by-laws or operating agreement, or alternatively, the opposite can also be true. Without an operating agreement, the heirs of a dead member of an LLC may demand to “cash out” their share of the business, thereby jeopardizing the long-term viability of the business. Accordingly, both the family of the dying owner and the remaining owner are at significant risk of losing value or control over a major asset that they worked so hard to create.
Tip #9 – Consider owning property in an offshore trust to provide an additional layer of protection.
Offshore trusts can provide an additional level of protection. An offshore trust is a trust established in another country that has laws favorable from an asset protection standpoint. The laws of certain countries generally provide that they do not automatically recognize a judgment issued by the court of another country. The result is that after a plaintiff gets a judgment against you here in the U.S., the plaintiff may be required to file suit against you in the country under which laws your asset protection trust is administered. Keep in mind, however, that the set-up and administrative costs of an asset protection trust often run into the tens of thousands of dollars, and that an offshore asset protection trust is not guaranteed to work. There have been cases in which a defendant who owned an offshore asset protection trust was held to be in contempt of a U.S. court for the defendant’s failure to liquidate the offshore trust to satisfy the judgment of the U.S. court.
Tip #10 – Consider Putting your Assets Into a Self-Settled Asset Protection Trust.
For those of my clients whose wealth may be subject to seizure by Medicaid, a particular kind of trust can avoid nursing home seizure of assets as well as achieve general asset protection. Under this type of trust, you have to give up something to certain beneficiaries (who are often family members) to get the property out of your name, but you may still retain full control over the assets for your life.
This strategy has the added feature of potentially sheltering your assets from lawsuits and seuzure generally, in addition to protecting your assets from the nursing home. Contact us for more information on this advanced estate planning tool.
Tip #11 – Consider using a Qualified Personal Residence Trust for your Home.
A Qualified Personal Residence Trust (“QPRT”) can be one of several alternatives used to protect your home. Keep in mind that Louisiana law only exempts the first $35,000 of home equity from general judgment creditors. In other words, if your house is worth $100,000 and the house is not encumbered by a mortgage, only $35,000 is exempt from seizure, and a judgment creditor can require your house to be sold to get the remaining $65,000 equity in the house. Thus, you can potentially be rendered homeless, or alternatively, you may be forced to obtain a home equity mortgage on your home of $65,000 to pay the judgment creditor.
One option is to transfer your home into a limited liability company. However, this option has certain disadvantages such as being subject to the rule of “veil piercing” noted above because your home is a “personal use asset”, not a business asset typically used for business purposes in an LLC.
A QPRT is a trust into which you contribute your home, retain the right to live in the home as a beneficiary of the trust, and name “principal beneficiaries” of the QPRT who will obtain ownership over the trust after a stated period. For example, suppose you create a QPRT and retain the right of beneficial enjoyment, as beneficiary of the QPRT, for a period of 25 years. After the end of 25 years, the ownership will revert to the principal beneficiaries of the QPRT who are your children. Under Louisiana law, only the portion that you retain can be seized by your creditors. In other words, your creditors would only be able to obtain a right to live in the house (or use the house) for 25 years. As a general proposition, this would make the seizure and sale of your house a difficult proposition for judgment creditors, because judgment creditors want to be able to obtain a right to have your home sold to get cash, rather than a right to use the home for 25 years.
Tip #12 – Consider entering into a marital agreement with your spouse to dissolve the community property regime.
Louisiana’s default property regime between spouses is the “community property” regime. Under Louisiana’s community property regime, one spouse’s actions can make all of the community property owned by the spouses subject to seizure. For example, suppose Dr. Dolittle owns a $500,000 house with his spouse, Mrs. Dolittle, and the house is part of the community property regime. If a judgment is rendered against Dr. Dolittle, then the entirety of the house, as well as all other community property assets can be subject to seizure.
However, if Dr. Dolittle and Mrs. Dolittle enter into a pre or post-marital agreement pursuant to which the community property regime will not apply, then if a judgment is rendered against Dr. Dolittle, only his one-half, or $250,000 will be subject to seizure and sale. Keep in mind that post-marital agreements opting out of the community property regime are subject to judicial approval. Despite the additional costs, overcoming this procedural hurdle is often worth the added asset protection it will provide to your family.
Tip #13 – Consider donating community property directly to a spouse.
If one spouse operates or engages in a risky enterprise, that spouse can gift his or her assets to the other spouse. For example, Dr. Dolittle can gift his assets to Mrs. Dolittle in order to make them exempt from seizure for the actions or omissions of Dr. Dolittle. Dr. Dolittle’s one-half community property would become the separate property of Mrs. Dolittle.
Keep in mind that this approach is not for the faint of heart. That is because you must gift away properly permanently in order for the property to be exempt from seizure. If Mrs. Dolittle later divorces Dr. Dolittle, then Dr. Dolittle can potentially walk away from the marriage with less than his “fair share” of the assets (because the assets were donated to Mrs. Dolittle). This type of an arrangement should only be used by spouses in stable marriages, who trust one another completely, and where the arrangement is entered into with “eyes wide open.”
Tip #14 – Convert non-exempt assets into exempt assets long before the need arises.
Major classes of assets exempt from seizure by judgment creditors include retirement accounts such as 401(k) accounts, IRA accounts, annuity accounts, Simplified Employee Pension Plans (SEPs), etc. as well as home furniture and furnishings used by the family, up to $7,500 equity in an automobile, and a person’s “tools of the trade” used to support himself and his family.
Within certain limitations, you can convert “non-exempt” assets into “exempt” assets (with certain limitations). A Louisiana resident should be aware of Louisiana’s fraudulent conveyance statue (discussed below) which may blunt the effect of this planning tip.
Tip #15 – Use Common Sense.
Remember that there is no such thing as “bullet proof” asset protection. Despite the claims of some, there is no “magic bullet.” A good asset protection plan is one made in advance, continually monitored and updated, and “tweaked” when necessary.
Tip #16 – Act now to protect your assets before an urgent need arises.
If you wait until the last minute to develop an asset protection plan, it may be too late. Louisiana’s fraudulent conveyance law (Revocatory Action) may give a judgment creditor ammunition to (undo) transfers that you make pursuant to an otherwise excellent asset protection plan. The best time to establish a sound asset protection plan is before a judgment or other storm clouds arise.