Why is asset pro­tec­tion plan­ning impor­tant for women?  Women, now more than ever, need to con­sid­er asset pro­tec­tion plan­ning because:

  • Women live longer than men and will like­ly need their mon­ey to last longer
  • At some point in their lives, women may have to man­age their own finances due to divorce, wid­ow­hood, or remain­ing sin­gle
  • Many women are suc­cess­ful busi­ness own­ers
  • A good asset pro­tec­tion plan can help you achieve finan­cial secu­ri­ty and inde­pen­dence, and give you an oppor­tu­ni­ty to have enough mon­ey to pro­vide for your com­fort­able sup­port and that of your depen­dents

 

Insur­ance is one part of your asset pro­tec­tion plan.  Often, the sim­plest way to pro­tect assets is by shift­ing the risk to an insur­ance com­pa­ny.  This should gen­er­al­ly be your first line of defense.  How­ev­er, insur­ance may not pro­vide all the pro­tec­tion you need, or it might not be avail­able. 

 

Oth­er asset pro­tec­tion strate­gies gen­er­al­ly involve trans­fer­ring legal own­er­ship of assets to oth­er per­sons or enti­ties, such as cor­po­ra­tions, lim­it­ed part­ner­ships, and trusts.  The log­ic behind shift­ing own­er­ship of assets is fair­ly straight­for­ward:  your cred­i­tors can’t reach assets you don’t own.  There are a num­ber of ways to imple­ment this asset pro­tec­tion strat­e­gy.  

 

Family Limited Partnership (FLP)

An FLP is a lim­it­ed part­ner­ship formed by fam­i­ly mem­bers only.  Assets that you own, such as a close­ly held busi­ness or any real estate (oth­er than your res­i­dence), may be placed in the part­ner­ship.  Gen­er­al­ly, a cred­i­tor can only obtain a charg­ing order against the FLP, which allows the cred­i­tor to receive any income dis­trib­uted by the gen­er­al part­ner (who is usu­al­ly a fam­i­ly mem­ber).  It does not allow the cred­i­tor access to the assets of the FLP.  Thus, a charg­ing order is not an attrac­tive rem­e­dy to most cred­i­tors, and con­se­quent­ly, its lim­i­ta­tions might con­vince a cred­i­tor to set­tle on more rea­son­able terms than might oth­er­wise be pos­si­ble.

 

Protective Trusts

Pro­tec­tive trusts are intend­ed to pro­tect your assets and/or estate from cred­i­tor claims, law­suits, and unwant­ed ben­e­fi­cia­ry, or oth­er threats.  Gen­er­al­ly, pro­tec­tive trusts work to pay income to the ben­e­fi­cia­ry you name in the trust.  The trust also can be set up to pay out for a spe­cif­ic pur­pose, such as edu­ca­tion expens­es, or care for a ben­e­fi­cia­ry with spe­cial needs.  In fact, you can name your­self as the ben­e­fi­cia­ry to ensure pay­ment of income while pro­tect­ing the trust assets from cred­i­tors and law­suits. 

Your cred­i­tors are only able to reach assets in the trust to the extent of your ben­e­fi­cial inter­est in those assets.  If you have no right to the assets of the trust, your cred­i­tors can’t reach them.  On the oth­er hand, if you are enti­tled only to trust income that is all your cred­i­tors can seek to attach.

 

Irrevocable Trusts

For an irrev­o­ca­ble trust to be effec­tive as an asset pro­tec­tion tool, you must not be able to revoke or change the trust once you estab­lish it.  This means you can’t dis­solve the trust, change ben­e­fi­cia­ries, remove assets from the trust, or change its terms.  But because you relin­quish con­trol over the assets you place in the trust, they are gen­er­al­ly beyond the reach of your cred­i­tors as well.  In addi­tion, by adding spe­cial lan­guage to your trust through a spend­thrift clause, you can fur­ther pro­tect trust assets from your ben­e­fi­cia­ries’ cred­i­tors.

Cau­tion: A revo­ca­ble trust, unlike an irrev­o­ca­ble trust, gen­er­al­ly does not pro­tect trust assets from cred­i­tor claims since you have con­trol over those trust assets. 

 

C Corporations

You might be a busi­ness own­er, or think­ing about start­ing a busi­ness.  If so, choos­ing a busi­ness enti­ty is an impor­tant deci­sion.  One option is a C cor­po­ra­tion.  The law views a C cor­po­ra­tion as a sep­a­rate legal enti­ty.  As such, busi­ness assets owned by a C cor­po­ra­tion are con­sid­ered sep­a­rate from your per­son­al assets, which will gen­er­al­ly not be at risk for the lia­bil­i­ties of the busi­ness.

How­ev­er, pro­tec­tion from lia­bil­i­ty may be lost if the busi­ness does not act like a busi­ness, such as when the busi­ness acts in bad faith, fails to observe cor­po­rate for­mal­i­ties (e.g., orga­ni­za­tion­al meet­ings), has its assets drained (e.g., unrea­son­ably high salaries paid to share­hold­er-employ­ees), is inad­e­quate­ly fund­ed, or has its funds com­min­gled with share­hold­ers’ funds. 

Cau­tion:  A num­ber of issues should be con­sid­ered when select­ing a form of busi­ness enti­ty, includ­ing tax con­sid­er­a­tions.  Con­sult an attor­ney and tax pro­fes­sion­al before shift­ing assets to a cor­po­ra­tion or oth­er busi­ness enti­ty. 

 

Limited liability Company (LLC)

An LLC is a hybrid of a part­ner­ship and a C cor­po­ra­tion.  An LLC is gen­er­al­ly taxed like a part­ner­ship with income and tax lia­bil­i­ties pass­ing through to its mem­bers (and not dou­ble-taxed as with a C cor­po­ra­tion), but it is viewed as a sep­a­rate legal enti­ty and can be used to own busi­ness assets, pro­tect­ing your per­son­al assets from busi­ness claims against the LLC.  While the legal for­mal­i­ties are based on state law, the legal require­ments to form and main­tain an LLC are usu­al­ly not as involved as those asso­ci­at­ed with a C cor­po­ra­tion.

 

Professional Corporation (PC), Limited Liability Partnership (LLP)

Many pro­fes­sion­al, such as lawyers, doc­tors, den­tists, and accoun­tants, face lia­bil­i­ty for dam­ages that result from the per­for­mance of the pro­fes­sion­al duties.  While no busi­ness struc­ture will pro­tect you from per­son­al lia­bil­i­ty for your own pro­fes­sion­al activ­i­ties, states have enact­ed laws allow­ing pro­fes­sion­als to join togeth­er to form pro­fes­sion­al cor­po­ra­tions where­in all par­tic­i­pat­ing cor­po­rate mem­bers are of the same pro­fes­sion.  An alter­na­tive form of busi­ness enti­ty suit­able for pro­fes­sion­als is the LLP.  Both and LLP and PC pro­tect you from the pro­fes­sion­al mis­takes of your part­ners.  That is, if one of your part­ners is sued for neg­li­gence, and the PC or LLP is also named in the law­suit, the part­ner sued may be liable per­son­al­ly for any judg­ment, but the PC or LLP should pro­tect your per­son­al assets form the reach of any judg­ment cred­i­tor of the enti­ty.

 

Domestic Self-Settled Trusts

The laws in a few states, such as Neva­da, Alas­ka, and Delaware, enable you to set up a domes­tic self-set­tled trust.  You can cre­ate this type of trust, trans­fer assets to the trust, and name your­self as ben­e­fi­cia­ry.  The key to a self-set­tled trust is that it gives the trustee dis­cre­tion over whether or when to dis­trib­ute trust prop­er­ty or income to ben­e­fi­cia­ries.  Cred­i­tors can only reach prop­er­ty that the ben­e­fi­cia­ry has a legal right to receive.  There­fore if you, as a trust ben­e­fi­cia­ry, don’t have access to trust prop­er­ty, your cred­i­tors will be unable to reach it as well. 

 

Offshore (foreign) Trusts

Many for­eign coun­tries have laws that make it dif­fi­cult for cred­i­tors to reach trust assets held in that for­eign coun­try.  In order for a cred­i­tor to reach assets held in a for­eign or off­shore trust, a court must have juris­dic­tion over the trustee or the trust assets.  A trust that is prop­er­ly estab­lished in a for­eign coun­try gen­er­al­ly does not allow juris­dic­tion of a U.S. court over the trustee.  A U.S. court will be unable to exert any of its pow­ers over the off­shore trustee.  For a cred­i­tor to assert a claim against trust assets, the suit must com­mence in the for­eign juris­dic­tion, with a lawyer licensed to prac­tice in that for­eign coun­try.  In addi­tion, the cred­i­tor will prob­a­bly have to post a bond with the for­eign court. Tak­en as a whole, these obsta­cles have the gen­er­al effect of deter­ring cred­i­tors from pur­su­ing actions in the for­eign court.