Articles

Protecting Your Assets from Lawsuits

We live in a different world from that of our parents. Today, anyone who has accumulated substantial assets or whose trade or profession makes them likely to be a defendant in a lawsuit should have their assets protected to the extent reasonably possible. This objective is usually addressed using a legal entity to hold some or all of the exposed assets. And the best planning involves the use of more than one type of structure to take full advantage of the individual protection characteristics of each type, and the additional protection when different types are used in combination. Choosing the correct legal vehicle is the key.

Some people form simple partnerships, not realizing that they (and their assets) may be held responsible for liabilities caused by the acts of their partner(s). Not good.

Many small businesses and professionals incorporate for protection. While it is true that the corporation is a separate legal entity from the owners, the fact is that most closely held corporations will not observe all the required formalities, resulting in the courts ignoring the corporate structure as if it had never existed. Then the owners are held to be liable individually. This is referred to as "piercing the corporate veil". It happens frequently.

The cornerstone of many of the better asset protection plans is the Limited Partnership, which is set up in such a manner that the protected person (and spouse, if desired) owns 1% as general partner and the protected person (and spouse) owns the other 99% as limited partner. Even if some, or all, of the Limited Partnership interest is given away later to children or grandchildren (perhaps to bring down the size of the taxable estate), the remaining small general partnership interest is still totally in control of all of the assets owned by the entire Limited Partnership.

The protection afforded here is that the assets owned in the Limited Partnership are not subject to the claims of a creditor of the partners, merely to a "charging order" against distributions. There probably won't be any distributions if there is a charging order in place against a member of the Limited Partnership. Additional restrictions can be written into the Limited Partnership Agreement to further impede the collection efforts of creditors of the individuals, sometimes so restrictive that the creditor gives up in frustration, realizing that there will be no genuine hope of collecting from this source.

What does the asset protection Limited Partnership actually own? Just about everything, but not owned outright or in its usual form. Instead, any asset which by its nature has potential for a lawsuit (apartments, commercial property, etc.) is owned by its own Limited Liability Company, and this LLC is then owned by the Limited Partnership. Having each such asset which has a risk of lawsuits separately owned by an individual LLC means that a lawsuit arising from the operation or ownership of that asset would be only against that individual LLC. The maximum potential loss, properly done, would be that one owned asset, keeping the remaining assets in the Limited Partnership fully protected. And with good planning the likelihood of losing even the asset in the LLC can be minimized.

This type of planning is not for everyone, but it can be crucially important for those persons (and assets) with sufficient exposure to the threat of lawsuits. Just make sure you have the necessary legal documents prepared by an attorney. Get it done by someone with experience in this area. You may not get a second chance.