What is “Domestic” Asset Protection?
The Use of LLCs and FLPs
The obvious answer is asset protection that is not done “offshore.”
If you are reading this page, we are assuming that you’ve already come to the determination that you need asset protection. If that is not the case, please click here to read a short summary as to why you (especially professionals) may need asset protection.
Domestic asset 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:
Domestic asset protection is a very diverse topic that is not taught in most formal educational environments.
As a general statement, domestic asset protection revolves around the use of family limited partnerships (FLPs) and limited liability companies (LLCs).
Why not a C- or S-Corporation?
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 set up 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:
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.
Summary on Domestic Asset Protection
Many people in this country do not have their assets protected correctly. While the topics of domestic asset protection merit 50+ pages, the above is a quick little summary of the bread and butter asset protection tool (which is 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.