Let’s briefly touch on some of techniques that serve our asset protection goals.

The very popular limited liability companies (LLCs) and family limited partnerships (LPs) share similar insulation qualities – state statute prohibits a creditor of an owner from putting liens on LLC/LP assets. Creditors are left with the choice of trying to prove the entity is a sham (generally difficult to do unless the owners were quite lax) or attempting to obtain a charging order – an award of the debtor owners share of profits.  A charging order is usually of no value as the debtor is the sole management and determines when, and if, profits will be distributed.  This does not preclude the owner from making loans to himself/herself, taking salary/bonuses, shifting profit to other uninvolved entities, etc. While one entity is simplest, if there is a problem asset or claim, the other assets of the same entity can be affected. Thus, most plans use segregation and separate assets into various entities.

Trusts are often discussed as if it were a one purpose tool but trusts have more than one hundred variations, each with significantly different features, control, tax treatment, and insulation qualities.

Revocable trusts, sometimes known as living trusts, are alternatives to a will and serve disposition and probate avoidance goals and offer no protection at the client’s level (though it can protect younger generations).

Irrevocable trusts often are used to own life insurance policies, or serve as receptacles for gifting, and can protect assets. However, insulation relies on separating the asset transferor from control, a point often missed and families are surprised that they cannot control or modify the trust or, if they retained control, that there is no protection. 

Grantor trusts usually serve as a deferred gifting tool; give assets away but at a later time to reduce the taxable amount of the gift. However, many put assets directly in children’s hands which shift control to the children and exposes the assets to the children’s claims and divorces. 

Asset protection trusts (available in several US states and multiple other countries) can be very powerful asset insulators. If structured well they can be treated as US trusts for income tax purposes (avoid the draconian foreign rules) and foreign for claims (not subject to US courts) and coordinate with death taxes. Since asset protection is a subspecialty, and the rules are fairly complex, many trusts focus on one goal and inadvertently create significant problems on other fronts. The scope of the information as presented, does not allow us to detail the many varieties of trusts but aims to emphasize that trusts are a valuable arrow in the asset protection quiver but are one of the most misapplied tools. 

Captive insurance companies have been in vogue and for good reason; they permit a family to create its own insurance company to deal with risks where coverage is too costly or unavailable. A captive can provide a tax favored fund to challenge claims not covered, or insufficiently covered, by traditional insurers. 

Some assets are not suitable for entity ownership. This often includes personal residences, properties with existing mortgages, receivables, etc. If one uses an engineered loan against the asset we can reduce the equity in the asset to such a low level that it would be unattractive to a creditor (equity stripping). Even if a creditor did pursue a claim, in a foreclosure the debt would be paid first and would separate equity from a creditor.

A combination of tools; LLCs, insurance, trusts, equity stripping, and a variety of others, are available to work collaboratively to provide substantial insulation while simultaneously reducing taxes, structuring transition to the next generation, while keeping control with the core family unit. Elite advisors, specializing in highly specialized coordinated planning can act as the conduit to surface, analyze, and organize implementation of asset protection programs and other areas of interest to the exceptionally affluent family.

The Family Office Association would like to thank contributing editor Adam Chodos.