Asset Protection Trust Vs. LLC

By Rob Jennings J.D.

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.

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.

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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.

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Can a Revocable Trust Be a Sole Member of an LLC?
 

References

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Can Creditors Get Property Put in Trust Before a Bankruptcy?

The law is full of questions that have both yes and no answers, particularly when it comes to bankruptcy and trusts. Some trusts can protect your assets from creditors, while others cannot. You may lose property in one type of bankruptcy, but not in another. Successfully using a trust to shield assets before you file depends on a lot of factors.

Can an Heir Be a Co-Trustee of the Trust?

An heir can be named as a trustee, even if he is a beneficiary. However, there are issues to consider when naming an heir as a trustee. The role of the trustee is to ensure that property is maintained and distributed for the benefit of the beneficiaries. As such, a beneficiary-trustee may be tempted to not share the trust property with the other beneficiaries and keep it all for himself.

Can Forming an LLC Protect Your Personal Property?

The limited liability company is one of several types of legal entities that people often use to protect their personal assets from business creditors. Since an LLC is created by filing a document with the state government, LLC laws vary somewhat from state to state. Nevertheless, the basic principles are the same throughout the United States.

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