LLCs offer good option for protecting assets
One of my earliest clients is a delightful couple who operate successful businesses in the Grand Valley. Bill’s business sense has generated moderate success, and Bill and Carole have been able to salt away enough in mutual funds they’re comfortable in thinking about retirement. They remain concerned, though, that their savings might not be there when retirement comes.
Bill recognizes that his business isn’t bullet proof, much less risk proof. In a split second the best laid financial plans could evaporate.
His awareness arose out of an article he’d read in a trade journal discussing asset protection planning for the owners of rental properties.
In one case, the owner of a rental house near a university had hired a contractor to make improvements on the property and, in the course of doing some trenching in the front yard, hit an unmarked gas line.
Fortunately, no one was killed in the ensuing, almost immediate, explosion that virtually leveled the house. But more than one tenant was at home when it happened. They were all taken to the hospital with severe burns and trauma.
Even a slight fender bender can render a business liable to an injured person. And when it happens, assets owned by Bill’s business are available to satisfy the creditor’s judgment.
Bill hasn’t panicked. But his description of imagining his businesses folding, crumpling into a wad and being thrown into the fireplace spoke volumes. The article had made its impact.
What’s even worse, Bill knew from his reading that his own personal assets, those owned by him and Carole, those retirement funds on which they’ve pinned their hopes and future, are likewise available to creditors.
As I discussed with Bill and Carole, there are a number of strategies available in estate and business planning to protect assets. There are also a number of techniques that at first appear to provide a safe harbor, but don’t at all.
This column focuses on one of the ways to protect an investment portfolio, be it large or small. This asset may not be a business asset. It’s Bill and Carole’s mutual funds account. It is a personal asset. Because there are certain rules applicable to such “qualified”
retirement accounts as an individual retirement account or 401(k) account, we’ll save a discussion of those for another day.
A common technique, and one that is a favorite of mine under many circumstances, is the judicious use of limited liability companies (LLCs). Forming a limited liability company and transferring ownership of the investment accounts to it will in many cases protect those investment accounts from creditor’s claims that turn out to be successfully prosecuted. As one might expect, this isn’t quite as simple as it sounds. There are traps that aren’t readily apparent to the untrained — and even “undertrained” — professional. While it’s easy and inexpensive to create an LLC, creating an LLC that actually offers practical protection requires skill and experience.
Once the company has been properly established, the mutual fund accounts can be retitled into the company’s name. The asset is then no longer owned by Bill and Carole, but by their LLC. The entity offers a fence or a corral around the asset that wouldn’t be available if Bill and Carole still personally owned the asset.
In addition to effectively building the LLC, it often needs to be sited in a state that offers protective laws more favorable to Bill and Carole than those offered in Colorado.
Colorado law allows a judge in a lawsuit to decide if it’s fair to the creditor to allow the protection. That’s an oversimplification, but is, in essence, a correct statement of Colorado law.
In appropriate cases, I recommend that clients form LLCs in such states as Wyoming, where state law allows a much greater degree of protection.
One of the most important points to remember whenever one is considering asset protection planning is that we need to be talking about creditors that clients don’t yet know. They’re not yet on the radar.
While estate planning offers strategies that can allow for protection planning even in the face of existing and known creditors, that is a special kind of case to be considered another time.