Many people focus a great deal of time and energy on accumulating assets, but generally pay less attention to an equally important task: protecting them. A person can lose a lifetime of hard work to medical bills or lawsuits in the blink of an eye. Asset protection trusts and limited liability companies, or LLCs, are two devices that may help shield one's property.
Fit your business needs with the right LLC package
Asset Protection Trust
An asset protection trust is an arrangement wherein one person or entity, called a "trustee," holds legal title to property for the benefit of another, called the "beneficiary." The beneficiary holds an equitable interest in the trust proceeds and property, but has no legal title to any of the trust property. As such, he cannot pledge trust assets as collateral for loans or sell the assets on his own. The trustee, on the other hand, holds legal title to the property but has no equitable interest in it. Asset protection trusts must be irrevocable, which means that the settlor -- the person who made the trust -- cannot go back and take property out of it. Asset protection trusts are sometimes called "spendthrift" trusts because they can, in many states, keep a beneficiary's creditors from reaching trust assets.
Limited Liability Company
An LLC, on the other hand, isn't an arrangement but a real corporate entity with a legal existence separate from the people that own it, called "members." While asset protection is one benefit of LLCs, organizers set up these entities for the primary purpose of engaging in some type of business, which is set forth in the articles of organization that they file with the state to begin corporate existence. An LLC can buy, sell and hold property, and while the members may control it and receive the benefits of company property, titles remains in the company.
How an Asset Protection Trust Protects Assets
When a settlor conveys property via an asset protection trust, she gives legal title to the trustee and equitable title to the beneficiary. The beneficiary's creditors can't get at the trust assets because he doesn't own them. The settlor doesn't own them, either, moving them a step ahead of her creditors. Creditors of the settlor, however, may be able to rope trust assets back into the settlor's estate depending upon the state and circumstances. The asset protection value of the trust diminishes where the settlor was at risk at or shortly after settling the trust, where the settlor retains control over the trust or where the trustees and beneficiaries are the same people.
How an LLC Protects Assets
An LLC acts as a shield between a member and claimants against an employee, another member or the company itself. This "limited liability shield" does not protect a member from liability for his own acts, however, whether committed in or outside of the course of business. There is also no protection where a claimant can show that the LLC is a "sham" company, set up solely to hide a member's assets from creditors; nor is there protection where the members fail to observe the proper formalities of LLC operation.
References & Resources
- Jupiterimages/Comstock/Getty Images