We spend a lifetime creating an estate. Our holdings make take a variety of forms and come from many different sources including the amount we save from our earnings, good investments choices, and gifts and inheritances received from family members. All you have accumulated can be lost in an instant without proper asset protection planning. DSRC is experienced in providing customized asset protection plans to meet your specific needs which include:
- Claims of creditors
- Tax claims and liens by the IRS and the New Jersey Division of Taxation
- Long term care and Medicaid eligibility
- Prenuptial Agreements
- Protecting bequests made to beneficiaries having special needs
- Minimizing income, estate and gift taxes
Asset Protection Trusts
Nineteen states including Alaska, Delaware and Nevada have enacted laws which authorize a person to be a beneficiary of his own trust (“Domestic Asset Protection Trust”) whereby the assets held in the trust are not subject to the claims of creditors.
The Domestic Asset Protection Trust may hold investment assets and real estate including a personal residence.
The trust employs a trust company to serve as the fiduciary. In order to qualify as an asset protection trust, the grantor cannot have any control over the trust distributions. The independent trustee is granted discretion in making distributions. However, the grantor can retain control over all investment decisions pertaining to the trust assets. The grantor also can retain the right to change trustees.
A Domestic Asset Protection Trust cannot be created in order to make “fraudulent conveyances.” Generally speaking, the trust will not provide asset protection from the claims of existing creditors. The trust is intended to be used to protect oneself against potential future claims. Nor will the trust be effective if it is used in an abusive manner to make yourself insolvent.
Limited Liability Companies
If a creditor obtains a judgment against you, then the creditor is entitled to systematically apply your assets in satisfaction of the judgment. Subject to the limited protection available in bankruptcy, the creditor can levy on all of the assets held in the debtor’s name including bank accounts, investment accounts, closely held businesses, and real estate including personal residences. (Note that assets held in qualified retirement plans and in IRAs are generally protected from the claims of creditors under federal and state law. However, they are not protected from the claims of the IRS.)
A debtor’s interest in a closely held corporation may be levied, and the creditor may be entitled to force distribution from the corporation’s assets to satisfy the debtor-shareholder’s personal indebtedness.
Limited liability companies and limited partnerships provide a unique form of asset protection. A creditor is not entitled to enforce his claim by levying on the debtor’s interest in an LLC. The creditor’s recourse is to obtain a “charging order” which authorizes the creditor to receive the distributions to which the debtor is entitled, if and when made by the LLC. In other words, the creditor cannot force the LLC to make distributions to satisfy the claims of the debtor-member of the LLC.
The Internal Revenue Service issued a revenue ruling whereby it held that a creditor who has obtained a charging order stands in the shoes of the debtor-member for income tax purposes. This means that the creditor is required to report all of the income allocated to the debtor-member whether or not the LLC makes distributions during the tax year. This creates a powerful incentive for creditors to settle their claims against debtor-members.
DSRC can provide the legal expertise to establish an LLC which will protect a debtor-member’s indebtedness from the claims of creditors.