Asset protection using layers and shells
Remember, the essence of asset protection is diversion. Smoke and mirrors. Keep those pea shells moving.
More hoops to jump through discourage potential attackers. For those with a lot of liability (or a lot to protect) a bit more complexity can take fortification to the next level.
One idea is the Delaware-style serial LLC, (which is basically a holding company with subsidiaries (one each to hold a rental property, for instance) whose intent is to minimize filing fees and red tape hassle.
Asset protection for businesses using equity splitting
Another way to apply this concept is equity splitting, where one splits a company into pieces to protect value. In this scenario, a school bus company would be split into a holding company which itself owned:
- an LLC which owns the buses
- an operating company which employs the drivers and;
- a management company that collects the money from the school district and contracts for service from the bus and driver divisions; if a driver goes whacko, the buses and the contracts with school districts are insulated. You can even have another company that finances the buses and holds notes and liens against them. Get a bus or ten in a judgment? No keys until you pay off those loans, bubba!
Holding companies for asset protection
Added protection can be afforded by using a holding company in an asset-protection-progressive jurisdiction, such as Nevada. This is also a great way to get anonymity, if important. A casual adversary may try to check things out in Tallahassee, but is unlikely to go digging in Carson City. You can even have holding companies owned by other holding companies. The more hoops, the better protected. Even the robots will scratch their heads.
Using debt layers for asset protection
Another technique is using mortgages and promissory notes.
In the previous example, if the buses are encumbered by debt that you own in another entity, even if a judgment attaches to the bus subsidiary, for a creditor to get the buses, they would first have to pay off the debt – which means giving cash to you!
Asset protection using the family limited partnership concept
A final technique is using an LLC variation of the old family limited partnership, or “FLIP” technique, which used to be very useful for estate freezing to avoid estate taxes before the F-BOT came to town. IN my view, FLIPs are pretty obsolete.
And, by the way, the best time to do asset protection planning is at the same time as estate planning—results tend to be cheaper, better coordinated with other wealth goals, and more effective.
Note that “limited partnership” – “LP” – LLC units can be real poison pills in asset protection planning. If a creditor accepts such a unit in satisfaction of a judgment or settlement, they get no real assets, and no income, but may have to pay tax on undistributed income!
As you can imagine, this can be very effective at keeping the bad guys at bay. Or screwing them over if they’re less well advised than you.
Limited liability limited partnerships – “LLLP”s – properly built are real bunkers, by the way. For you itching to jump ahead to estate planning, ain’t no reason in the world you can’t put LPs or LLLPs into your F-BOTs, shugah!
Proper note structure for asset protection
If you find a reason to use this borrowing equity splitting technique, it is important to follow the form to actually have a legitimate and defensible note. While I’m no lawyer (despite getting a masters in tax law from Georgetown Law, so please don’t construe any of this book as legal advice!), I strongly suggest you follow the UCC (Uniform Commercial Code) format in terms of setting up the notes. It is important to execute, and properly record, such notes, but for instance Florida imposes a tax on this activity. Commerce being what it is, a cottage industry has sprung up to service such needs as these in south Georgia, and many who need to do this find themselves slipping north of the border to execute their notes, in places like Kingsland/St. Mary’s, GA (conveniently located off I-95, a mile or so into the Peach State), or on their way to a cultural event in Savannah or Atlanta. Frugal is as frugal does, Forrest!
Why promissory notes are effective for asset protection
This technique works because debt is a higher obligation than equity. If you own the bus, but owe against it, a predator can’t take the bus unless they pay the note off first. Ditto for real estate, just make sure such debt is evidenced by a recorded mortgage (hard to beat the recording tax on this one).
So the basic technique is to lend money from one, low risk entity (a personal holding company, say) to another entity which pledges assets (real estate, buses, cranes, whatever of value) as security for the loan.
Make sure to follow the form of legitimate debt, including reasonable interest (this is tax neutral in most cases since you are just taking money from one pocket to another). If the crane crashes into a bridge, the company that owns it can be sued, but the crane itself can’t be taken unless the note is paid off first. Again, too much trouble, not enough to get, the attackers are encouraged to settle for pennies or go away entirely. Eureka!
How to get started on your asset protection
We have covered a lot of ground in this article. While some of the concepts may seem complicated—and asset protection, as an aspect of the broader discipline of wealth management should be meticulous to work properly—a good plan is actually quite simple for clients to set up and live with, provided they get good advice (sadly this is frequently not the case, and a good reason to get a second opinion). The important thing is to take the time to get your plan in order, or reviewed if you have one. For the great majority of families, this is simple, quick, cheap and easy—if action is taken before a problem appears. If not, and fortune’s winds blow the wrong way, the result could be complicated, unending, extremely expensive, and hard—not to mention painful.