Asset Protection
Mathew N. Sorensen, Attorney at Law
Kyler Kohler & Ostermiller, LLP
www.kkolawyers.com mat@kkolawyers.com
Salt Lake City, UT * Las Vegas, NV * Beverly Hills, CA * Cedar City, UT
Telephone 435.586.9366 / Facsimile 435.586.9491
© Kyler Kohler & Ostermiller, LLP 2007
Disclaimer- Although the information contained in this
Presentation may be extremely useful and helpful, please
understand that the presentation of this information does
not constitute an attorney-client relationship. Moreover,
the information contained in this Presentation is for
general guidance only. It is strongly recommended that
each individual or entity obtain their own legal advice,
particularly applied to their own set of circumstances, facts
and specific situation. Kyler Kohler & Ostermiller, LLP is
not responsible or liable for any advice that is taken and
applied in a situation without direct consultation and
representation specific to that individual’s or company’s
needs.
Asset Protection Summary
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Protect your personal assets from your business. Corporate veil.
Protect your business assets from your self. Charging order for LP
and LLC. Problems with single member LLC.
Protecting personal assets such as cabins, 2nd homes, etc… FLP or
irrevocable trusts.
Protecting the equity in your Home. Equity stripping.
What doesn’t work? Land Trusts and Fraudulent Transfers.
Quick and Easy Asset protection. Exemptions and exempt assets
(homestead, retirement accounts) tenants by the entirety.
What is new in Asset Protection? The Series LLC.
Copyright 2007
Kyler Kohler & Ostermiller LLP
435-586-9366
kkolawyers.com
Inside Liability- Liability created inside the business. Goal is to
protect the personal assets of the business owner from the liability
created in the business with the corporate veil protection.
Business entity
Business owner
Judgment
Corporate Veil
1) Corporate veil provides that the business owner is not held
personally liable for the debts or liabilities of the company.
2) Corporate veil protection is available in an LLC, LP, or
corporation.
Outside Liability- Liability created outside of the business in a
personal capacity. Once a creditor obtains a judgment against a
business owner personally they then attempt to obtain the assets
of that individual including their assets owned in a business
entity. Goal is to protect the business assets from the liability
created personally by the business owner.
Business Entity
Business owner who has
a judgment entered
against him personally.
Judgment creditor attacks
individuals ownership in
business entity. If there is no
Charging Order Protection
Entity, then the creditor can
obtain ownership of business
entity and force the sale of
assets.
Charging Order Protection Entity
Rental
Rental
Rental
XYZ
Holdings, LLC, FLP
or LP
Firewall from liability for Charging Order Protection Entity
STEP 2:
Judgment
Creditor Tries
to Obtain
Partner’s assets
held in entity
STEP 1: Partner Has
Personal Judgment
Entered Against Him
Partner
Partner
Charging Order Protection Entity
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Charging order protection provides that the creditor only obtains a
right to distributions. A creditor with a charging order does not get
voting rights and cannot force the sale of assets. A Charging Order
Protection Entity can stop making distributions so creditor never
obtains assets.
The poison pill strategy. Creditor obtains the right to distributions of
income and the responsibility for the taxes for that income even if
the creditor does not receive the income.
Most commonly used Charging Order Protection Entity is the
Limited Partnership.
LLC’s may provide charging order protection but you need to be
careful with single member LLC’s as they may not receive charging
order protection. Problem with single member LLC is that there is
no innocent partner to protect.
How do I protect the
equity in my home?
• 1) Equity stripping- Concept is that you strip the
equity from your home leaving a creditor with
nothing of value to attach. Makes the asset appear
less desirable.
• 2) Homestead exemption- Most states have a
homestead exemption which protects a certain
level of equity in your home. It can vary from an
unlimited amount in Florida (OJ Simpson) to
nothing in some states.
What about land trusts?
Can’t I just transfer the asset
when I have a liability?
• Land Trusts- Land trusts are a much talked about but rarely used tool in
asset protection. We occasionally see clients using land trusts but they are
not used as an asset protection tool. A land trust is a revocable trust
which means that you can change the terms and pull the asset out. You
have just as much power to pull the asset out as you do to pull money out
of a checking account to pay a creditor. There is no corporate veil in a
land trust.
•Every state has a fraudulent transfer law which essentially states that
you cannot transfer an asset to hinder a known creditor. What this means
is that asset protection planning must occur before a liability has been
created.
Retirement Accounts
• Most employer sponsored retirement
accounts (401k, pension, defined benefit
plans) are exempt from creditors collection
efforts. IRA type accounts are protected in
most but not all states. If your account is
protected, a creditor cannot go after the
retirement account assets.
Asset Protection Strategies That Work
Series LLC
Master LLC
Series 1
Series 2
Series 4
Series 3
Series 5
Series LLC Basics
1) Must treat each series as a separate entity.
-Hold property and contract in name of the series (e.g., Series 1 of Jones Real
Estate, LLC).
-Maintain separate accounts and records for each series.
2) States where the Series LLC is recognized. More and more states are considering
adopting the Series LLC statute.
-Delaware, Illinois, Nevada, Iowa, Oklahoma, Tennessee, and Utah.
Asset Protection Strategies That Work
Benefits and Concerns of the Series LLC
Benefits
Concerns
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Avoid the problem of having “all of
your eggs in one basket”. Each series
is treated as a separate entity from
the other series so that when a
lawsuit occurs in one series the
creditor plaintiff can only attack the
assets in the series being sued. For
example, if you had a lawsuit
regarding a property in Series 1, then
only the assets in Series 1 would be
available to a creditor. The assets in
Series 2-5 would be protected from
the liability created in Series 1.
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Careful consideration should be used
before using the Series LLC in states that
do not have a Series LLC statute.
•
This is a new area of the law and there is
no specific guidance from the IRS on
whether one tax return for the mater LLC
will be required or whether a separate tax
return will be required for each Series
within the LLC. The practical approach
seems to be to treat each series of the
LLC as a wholly owned subsidiary
company and thus only do a single LLC
tax return for the multiple entities.
Reduce costs and expenses from
setting up multiple entities. Traditional
approach to obtain separate
treatment is to set up multiple entities.
•
Caution in California. The Franchise Tax
Board Revenue Ruling requires that each
Series of the LLC pay the minimum $800
franchise tax.
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Copyright 2007
Kyler Kohler & Ostermiller LLP
435-586-9366
Kkolawyers.com
THANK YOU
Mathew Sorensen, Attorney at Law
Kyler Kohler & Ostermiller, LLP
856 South Sage Dr., Suite 300
Cedar City, Utah 84720
Telephone 435.586.9366
Facsimile 435.586.9491
mat@kkolawyers.com
www.kkolawyers.com
Salt Lake City – Las Vegas – Beverly Hills – Cedar City