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EXAMPLES
OF ASSET PROTECTION
Example One:
Assume a husband and wife have declared their home, which is paid
for and debt-free, as their homestead. Yet, they own substantial real
estate that cannot be used as their homestead.
Pursuant to a statutory marital partition agreement, the husband
and wife divide the property into equal shares. Then, the husband and
wife contribute their undivided interest in the land into a family
limited partnership.
They donate the land
in exchange for a limited partnership interest of 50% each. One party is
designated as the general partner. Thereafter, the husband and wife
create two spendthrift trusts, each one for their children.
The trustee of each of the trusts may be some business partners,
such as a financial planner, CPA or attorney.
The husband and wife then make a formal gift to each of the two
trusts out of the separate property limited partnership interests.
Since the husband and wife are separate donors, by taking
advantage of the $10,000 gift exclusion each year, they can give away
$20,000 to each trust per year. This
is pursuant to Internal Revenue Code Section 2503(b).
At the conclusion of
the limited partnership's creation and transfer, the husband and wife no
longer own a real estate community asset which is 100% subject to the
claims of the husband and wife's creditors. Instead, the limited
partners own an interest in a limited partnership which owns the land.
The limited
partnership interests are owned by a husband and a wife. In this
situation, the limited partnership provides that 85 percent in interests
of the limited partners must consent to an amendment, change or
dissolution of the limited partnership. Therefore, a creditor cannot
force a dissolution of a partnership and a sale of the property.
The creditor,
therefore, may own an interest in the limited partnership, but
effectively, cannot do anything with the land. The limited partnership
must be designed for strict ownership to preclude assets from being
transferred to third parties. Rights of first refusal and buy-sell
provisions are required. The above is also appropriate to continue the
management and control of the family assets in the limited partnership.
Example Two:
A business that has the ability to produce a large amount of
income, but at the same time may have substantial risks, can be set up
as a limited liability company. This could be the initial shock-absorber
from a lawsuit. That company should own the minimal equipment necessary
to do some of its business functions, as long as that equipment does not
have large values.
If the equipment is
readily expendable and has a short useful life, then it would be
appropriate to keep that equipment in the company.
Certainly, office supplies and miscellaneous day-to-day items
should be owned by the company. Large-ticket
items, such as buildings, heavy machinery, or expensive pieces of
personal property or equipment that have long useful life can be owned
by another entity and leased to limited liability company.
This way, those assets may be protected and may be used by the
business to generate money. Yet, the ownership of this equipment, can be
protected from liabilities incurred with the business.
Combining both
examples above, a children's trust may own the equipment and then lease
the equipment to the limited liability company. The assets of the
children's trust are generally protected from lawsuits against the
business. An irrevocable
trust may also be set up to hold life insurance on the business owners
so that the death of the surviving spouse, the insurance will not be
subject to federal or state taxes.
Since the trust is irrevocable, a tremendous asset protection is
available for the assets and the irrevocable trust. The trust can own
more than one life insurance policy. It can own more than just life
insurance.
For assets over and
above the business corporation, one can consider a family limited
partnerships as set forth in the example above.
Since a judgment creditor only gets a charging order against the
limited partnership interest, investment properties and assets can be
owned and maintained in a limited partnership. The creditors may not be
able to remove the general partner of the limited partnership.
Therefore, the creditor has no say-so in how the property is managed or
how income is distributed.
This area of law is
very complicated so please feel free to consult further with us and/or
your tax expert to determine how best to protect you or your company.
We look forward to answering your questions.
Article Adapted From
Westlaw
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