Asset Protection Fallacies

The Uniform Trust Code and the Fraudulent Transfer Act changed the pre-2000 asset protection no-holds-bared landscape.

Limited Liability Companies and Corporations provide limited liability for members and shareholders and notwithstanding the limited asset protection provide through limited liability, LLC’s and Corporations do not and cannot provide comprehensive asset protection. Revocable Trusts or Living Trusts avoid probate and protect nothing.

Rule #1. If you own it, control it, or have direct control over receiving a benefit from it, it can be taken from you.

THE FALLACIES

Let's explore the various ways that people try to protect their assets relying on Fallacies.

THE LLC

If you own and control your LLC, there is a nexus to any assets that the LLC contains. Refer back to Rule #1.  LLCs have a purpose and that purpose is typically to allow you to run a business.  A properly organized LLC will allow you to run your business as you see fit.  Many promoters will tell you that an LLC is "bullet-proof" because in some states the court will not issue a standard creditor judgment, but instead a "charging order."

Now, let's examine the rest of the story. If your LLC has scheduled disbursements the court can order those to be paid to the creditor, otherwise the creditor may not be able to invade the LLC and directly take assets.  But, neither can you.  Some Promoters will tell you that you can borrow or transfer funds from your LLC to another, even with a judgment in place but the Fraudulent Transfer Act begs to differ – as does the court system. The court can imprison you for such actions and confiscate your assets.  You and the Promoter can always hope the creditor forgets to renew the judgment every ten years.    

THE CORPORATION

You own and control the corporation and therefore, there is a nexus between you and any assets that the corporation contains.  Refer back to Rule #1.  You may be familiar with the term "Piercing the Corporate Veil".  It is so common now in creditor lawsuits that they include your corporation stock (asset) in the same lawsuit they file against you. 

THE SUBCHAPTER S CORPORATION

It is basically a proprietorship with limited liability.  Refer back to Rule #1.

THE LIMITED PARTNERSHIPS (Including Family Partnerships)

Your portion of the partnership that you have ownership of is your asset.  Refer to Rule #1.

THE REVOCABLE TRUST, BETTER KNOWN AS LIVING TRUST

Many people have been led to believe that if it says "Trust" on the documents then they have asset protection.  The IRS and our legal system disagree. Please refer to the “Protecting Asset” section of this website for a deeper discussion.    

THE BUSINESS TRUST; CORP SOLE; ASSOCIATION

There are promoters of statutory and non-statutory Business Trusts, Associations and Corp Soles as asset protection solutions and respectfully, we strongly disagree based upon the history of outcomes when challenged by IRS or in front of a judiciary body.

A mail box does not meet the statutory requirement for a Registered Agent; and

The trustee’s physical location is a determining factor in any tax or civil dispute involving trusts; and

They do not avoid Medicaid Estate Recovery and they do not enable Settlors/Grantors to escape state income tax.

THE BOTTOM LINE

If you own or control an asset or distribution entitlement, it can be attached or taken from you to pay your creditors AND it also establishes a nexus or connection that allows a given state to apply their income tax.

THE SOLUTION.

The greatest majority of the best Estate Planning legal minds in our country and offshore agree that the best method of implementing a wealth management and asset protection program is through a properly constructed irrevocable trust. It is the preferred method by wealthy and successful professionals in our country and abroad and has been for well over a century.

Why is this the best and preferred way to protect your assets? Because you separate legal title and equitable ownership.

An Irrevocable Trust is a legal instrument that separates Legal Title and Equitable Ownership

Legal Title:  “A title that evidences apparent ownership, as distinguished from equitable title that indicates beneficial interest.”  Blacks Law Dictionary (6th ed.)

Separation of Legal Title and Equitable Ownership - A fundamental essential of any Trust is a separation of the legal estate from equitable estate and beneficial enjoyment; there can be no Trust when both the legal title and beneficial interest are in the same person.”  54 Am. Jur. Trusts § 35 (1944).
Comments