The Building Blocks of Asset Protection

The building blocks used in asset protection structures include: the corporation, the family limited partnership, the limited liability company, wills, trusts, and an arsenal of offshore tools. To help familiarize you with terminology and uses, here is an overview.

The Corporation

Incorporating your business is one way to protect some of your personal assets from creditors' claims. To incorporate, you must file articles of incorporation with the secretary of state. The articles establish the corporation as a legally separate entity for liability and tax purposes, apart from the person(s) who started it. This separate identity makes incorporating your business certainly more protective of your personal assets than the sole proprietorship, which is, in the eyes of the law, one and the same as the person who owns it. A corporation is owned by its shareholders, directed by its board of directors, and managed on a day-to-day basis by its officers.

ncorporating your business is one way to protect some of your personal assets from creditors' claims. To incorporate, you must file articles of incorporation with the secretary of state. The articles establish the corporation as a legally separate entity for liability and tax purposes, apart from the person(s) who started it. This separate identity makes incorporating your business certainly more protective of your personal assets than the sole proprietorship, which is, in the eyes of the law, one and the same as the person who owns it. A corporation is owned by its shareholders, directed by its board of directors, and managed on a day-to-day basis by its officers.

Most corporations are privately owned ("closely held"), although we might be more familiar with the publicly held corporations that trade their shares on the stock exchange. Since a corporation, and not its owners, is generally liable for its business obligations, the most that an owner usually stands to lose if the business starts to struggle is what he paid for his ownership shares; hence, the limited liability protection. However, there are important formalities that must be followed in order to keep your corporation's limited liability protection in the face of creditors' attacks, and non-compliance can subject the officers, directors, and owners to personal liability. Furthermore, because a corporation is taxed on its profits, and owners are taxed on income from corporate dividends, this dual taxation may make it a less attractive vehicle for asset protection than other entities.

The Family Limited Partnership

A favorite component used in planning is the family limited partnership (FLP), which is in essence a limited partnership whose members are related to one another. The FLP, rather than individual members, holds certain family assets, like the interest in a family business. It can also hold title to the family home, brokerage accounts, vacation property, or any other asset. Having the partnership own the assets removes the assets from a partner's individual holdings, which consequently prevents creditors from personally seizing them from an individual. It also has the additional benefits of eliminating a portion of the assets from the probate process (the court procedure required to administer the disposition of your property upon your death), maintaining privacy of membership, and potentially offering significant tax advantages in any valuation of assets.

The FLP has at least one general partner, who manages the partnership and assumes liability for partnership debts and obligations. The rest of the members are limited partners who enjoy limited liability for partnership debt, to the extent of whatever they contributed to the partnership's assets (e.g., their percentage of ownership of the family business). Traditionally, one senior family member is designated general partner because he or she often contributes the majority of assets to the partnership, and frequently wants to control the management and distribution of the assets to preserve them for future generations. The limited partners acquire additional ownership with age and/or participation in the family business.

Structuring a family limited partnership by giving the general partner a small interest in the partnership, and limited members a greater interest, restricts creditors from claiming rights to the bulk of the assets. It is critical that the partnership agreement specifies the relative powers and interests of the partners, as well as how assets may be transferred. Any provision for transferability of ownership interest should limit transfers to family members in order to remove the possibility that creditors could become transferees of partnership assets. Frequently, the only legal remedy available to creditors is a charging order , under which the creditor becomes an assignee of the debtor-partner's share in the partnership. As assignee, the creditor has the right to receive distributions that the debtor-partner would receive, which would be nothing if the general partner makes no distributions. The assignee status is particularly unattractive to a creditor since it subjects him to the tax due on his share of the partnership's undistributed income ("phantom income").

A family limited partnership is a formidable defense against creditors, but the general partner does carry the risk of personal liability if it is an individual, since a creditor can go after the personal assets of the general partner to satisfy the partnership's debt. To buttress the FLP against creditors' claims by removing personal liability from the general partner, a popular option is to make the general partner a corporation or limited liability company that, in turn, is owned or managed by the person with controlling interest in the FLP.

The Limited Liability Company

The limited liability company (LLC) can be set up just like the family limited partnership, with features like manager and members, and favorable tax treatment, but it also enjoys the added benefit of protection from personal liability for the manager. The LLC is a relatively new entity in the U.S. (1977), and state statutes govern how it is established. Your attorney should advise you on compliance requirements. In certain circumstances, such as a fraudulent transfer (made intentionally to deceive a creditor), self-dealing (where, for example, a member borrows money from the company and repays it at an interest rate lower than market), or non-compliance with formalities (like commingling of assets, rather than separating personal and company accounts), a court has discretion to freeze the assets held within the LLC, or pierce its protective structure, rendering its members personally liable to creditors. To further strengthen your defenses against creditors, consider establishing an offshore LLC.

The Offshore Limited Liability Company

The offshore limited liability company is similar to the domestic LLC, but it is created in an offshore (outside the U.S. ) jurisdiction in order to take advantage of foreign laws that are more favorable to asset protection strategies than their U.S. counterparts. An LLC properly established in another country will be insulated from the reach of domestic creditors; such creditors will probably have to stake their claims in the foreign court, an expensive and time-consuming prospect that serves as a potential bar to litigation. Even if a creditor wanted to proceed against the offshore LLC, due to the practical barriers, settlement options are frequently tilted in favor of the offshore interests. Your attorney should have a focus in international law, and be particularly well informed of the laws governing formation and dissolution of LLCs in the various countries that offer such protection.

This article is designed to introduce you to the importance of asset planning and the need to protect your wealth. It is published as part of general information series for visitors to our web site. If you need to pursue an asset protection strategy, make sure you do it with the assistance of a professional.

This informational article is published by Greenberg & Co., Two Corporate Drive - Suite 234, Shelton, CT 06484 USA. We can be contacted via telephone by calling (203) 225-0200. Our website address is: www.greenbergandco.com, and we can also be reached by email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . Any request for permission to distribute, reprint, or publish this copyrighted material must be submitted to the above address in writing.