Single Member LLCs for Asset Protection

IAN M. FISHERAt Hoffman & Associates, we advise many of our clients to form limited liability companies, known as LLCs, to hold and protect their assets. In general, an owner of an LLC interest, or a “member” of the LLC, will not be responsible for any debts of the LLC, which is a win-win situation for the client. Further, if the member gets sued for something related to the LLC, such as the actions of an employee of the LLC or product liability from a product produced by the LLC, the member’s personal property will be shielded from the person suing the LLC.

Additionally, if a member is sued for something unrelated to the LLC, the member’s LLC interest will be somewhat shielded from that judgment creditor. Often the remedy for a judgment creditor against a member of an LLC is what is known as a “charging order,” which means they cannot take ownership of the LLC, but will be entitled to any LLC distributions to that Member.

However, in a few limited instances, a court will look through the LLC to get to a Member’s assets, known as “piercing the veil” of the LLC. Generally, this is done in the case of an LLC with only one member, which is the situation numerous clients find themselves in – they do not have a partner to add or do not want to add a partner to their business. Even with this risk, many clients will want to own the whole LLC themselves, which is a very simple structure, since all of the LLC’s taxes would pass through to that single member.

Often, states are more likely to pierce the veil or not limit the remedy to a charging order in the case of single-member LLCs, or SMLLCs. In fact, only a handful of states limit action against a member of a SMLLC to a charging order. Delaware, Nevada and Wyoming are the popular states that offer this statutory protection. If a client is focused on asset protection and does not want an additional LLC member, forming the LLC in one of these three states is the best course of action.

Even in a state that limits a remedy to a charging order, a court can still pierce the veil of a SMLLC if the LLC member does not respect the structure of the LLC. In a recent Wyoming case, Greenhunter Energy, Inc. v. Western, 2014 WY 144, (WY S.C., Nov. 7, 2014), the Wyoming Supreme Court completely disregarded a SMLLC because the Member did not treat the LLC like a separate operating entity. There were numerous problems in this case, but they are easily avoidable with a proper Operating Agreement and by respecting the LLC as a separate entity.

Some clients desire more anonymity. Delaware, Nevada, and Wyoming all require a manager’s name to be filed with the state, which becomes an easily accessible public record. If a client also desires anonymity, one option would be to form an LLC in a state that does not require a manager’s name to be listed (such as Georgia) and have that LLC serve as the manager of the SMLLC.

Although the SMLLC can be ineffective if not formed and used properly, as shown in the Greenhunter Energy case, it can be a great tool for those clients who have asset protection goals, even if they do not want to bring a partner into their business. If this is you or someone you know, please contact Hoffman & Associates to discuss a single-member LLC to protect your assets.

For more information regarding this or any other business law concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

 

Why YOU should have a BDIT

Ian 1As a business owner, does anything sound better than having your business protected from creditors and having it grow completely outside of your estate while still having full control over it? The Beneficiary Defective Inheritor’s Trust (the “BDIT”) technique allows all of that. Essentially, a trust beneficiary, the business owner, YOU, can grow your business in a trust established for you by someone else.

The biggest advantage of this strategy is that the BDIT will be for the benefit of the business owner and will be completely discretionary, so there will be no problem getting money out of the company if needed. Some other benefits of this trust are that the beneficiary/business owner has significant control over the trust property and it is a grantor trust with respect to the beneficiary, so that will further remove assets from the beneficiary’s estate while the assets grow tax free. One other advantage is that a BDIT is more flexible than a defective grantor trust as far as changing beneficiaries of the trust, so it might be a good option if a parent is not sure if their child can handle a business or a similar situation.

The mechanics of the BDIT are as follows:

  1. A Parent (or other third party, hereinafter the “Parent”) forms the trust (in a favorable jurisdiction for asset protection) for the benefit of the business owner;
  2.  The Parent contributes $5,000 cash to the trust and allocates $5,000 of GST exemption to it;
  3.  The Parent grants the beneficiary a Crummey power of withdrawal over the $5,000 for 30 days and it lapses;
  4.  The Parent retains no powers that could trigger the grantor trust rules for the Parent;
  5.  The Parent grants full discretion over distributions of income and principal to a third-party trustee;
  6.  The child is granted the power to remove and replace the independent trustee with another independent trustee;
  7.  The Parent grants a broad special power of appointment to the child, exercisable during life or at death;
  8.  The beneficiary will be the Investment Trustee and control all managerial decisions; and
  9.  A formula clause will be used to shift any unintended gifted assets to a non-GST tax exempt BDIT.

However, because the BDIT is a very complex strategy, it must be documented, implemented, and administered very carefully.  If all the proper procedures are followed, this transaction is legitimate despite the IRS not liking it.  Anyone with a growing business should look into a BDIT

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Which Comes First? Estate Planning or Exit Planning?

Mike_Hoffman_17I would like to share an excellent article with you written by Denis M. Brown from Pace Capital Resources, LLC.  It is from The Exit Planning Review newsletter, issue 256, dated May 7, 2013.  Which Comes First? Estate Planning or Exit Planning?

Sincerely,

Mike

 

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

 

Legal Matters in Starting Your Business

Mike_Hoffman_17Join Mike Hoffman in this 74 minute audio as he hosts the 11th session of the 24 hour MBA in discussing how to get your business off the ground.  There are many different legal options in starting a business, and in this audio session, you will understand the best way to start your business and keep it successful for future generations.  24hrmba-11.mp3

 

What the New Tax Law Means to You

As you probably know, Congress avoided the so-called fiscal cliff by passing – at the 12th hour –the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), signed into law by the President on January 2, 2013. The 2012 Tax Act makes several important revisions to the tax code that will affect estate planning for the foreseeable future. What follows is a brief description of some of these revisions – and their impact:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for all Americans; for more than ten years, we have been planning with uncertainty under legislation that contained built in expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have more certainty with which to plan.
  • The federal gift and estate tax exemptions will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains. So if you did not take advantage of this in 2011 or 2012, you can still do so – and there are advantages to doing so sooner rather than later. Also, with the amount tied to inflation, you can expect to be able to transfer even more each year in the future.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows you to take advantage of planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to proper estate planning using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 to $14,000, meaning you can give up to $14,000 per beneficiary, per year ($28,000 for a married couple) free of federal gift,  estate and GST tax – in addition to the $5 million gift, estate, and GST tax exemptions. By making annual tax-free transfers while you are alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing your taxable estate and removing future appreciation on assets you transfer. And, you can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing you to transfer more free of tax.  Gifting to Family Trusts allows the tremendous advantage of gifting to one destination, while using the annual gift exclusions for all of your descendants.

For most Americans, the 2012 Tax Act has removed the emphasis on planning for worst case scenarios and put it back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want. This includes:

  • Protecting you, your family, and your assets in the event of incapacity;
  • Ensuring your assets are distributed the way you want;
  • Protecting your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  • Providing for a loved one with special needs without losing valuable government benefits; and
  • Helping protect assets from creditors and frivolous lawsuits; and from estate depletion to fund nursing home costs.

For those with estates less than the $5.25 million exemption amount, trusts should still provide much valued asset protection.  However, those who are less concerned about asset protection may want to review options for unwinding previous transactions to the extent possible and, at a minimum, review their estate plan to ensure proper income tax planning (see below).

For those with larger estates, ample opportunities remain to transfer large amounts tax free to future generations, but it is critical that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.   REVENUE RAISING PROPOSALS INCLUDE 1) LIMITING THE BENEFITS OF GRANTOR TRUSTS, 2) LIMITING THE DURATION OF ALLOCATION OF GST EXEMPTION, 3) IMPOSING A MINIMUM 10 YEAR TERM FOR GRANTOR RETAINED ANNUITY TRUSTS (“GRATS”), AND 4) REDUCING THE AVAILABILITY OF ENTITY BASED VALUATION DISCOUNTS.  These are all tools that can reduce your estate tax exposure but that may not be available much longer.  Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.

Further, as is well publicized, the 2012 Tax Act included several income tax rate increases on those earning more than $400,000 ($450,000 for married couples filing jointly).  Combined with the two additional income tax rate increases resulting from the healthcare bill, income tax planning for individuals is obviously now more important than ever.

What hasn’t been as publicized is that trusts (only those trusts not taxed as grantor trusts) and estates will be subject to these new taxes and higher tax rates on income above $11,950.   Proper income tax/distribution planning for trusts and estates will be essential going forward to minimize these burdensome tax increases.

Income tax basis planning will also be more important.  Many trusts hold highly appreciated, low tax basis assets. Reverse DGT transactions – purchasing low basis assets back from grantor trusts – can be used to obtain a step up in basis at death.  Trusts may be able to be amended and/or restated to allow a Trust Protector to identify low basis assets and take certain actions that would cause them to get a step up in tax basis at your death.   For assets not already in trust, Alaska Community Property Trusts can be utilized to get a double step up in tax basis at both spouse’s deaths.

The good news is that if you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over.  We have increased certainty with “permanent” laws and you can have some comfort that the rules won’t drastically shift from year to year.  Unfortunately, for those of you with larger estates, planning techniques that can be utilized to reduce estate tax exposure are still on the chopping block – so don’t wait to plan.  For all clients, income tax planning, including income tax basis planning, should be a focus this year.  As always, the ultimate goals of estate planning, including protecting family assets and providing for loved ones, do not change.  Make sure you have a good plan to meet these goals. Schedule an appointment today by calling us at (404) 255-7400.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Asset Protection: You Get What You Pay For

As estate planning, tax and business lawyers, we are always concerned with asset protection.  Whether we are talking in the context of trusts for surviving spouses or descendants, or protecting personal assets from business hiccups, asset protection is at the front of our minds when advising clients.

Asset protection comes in all shapes and sizes, from the simple to the ultra complex. Rules can vary significantly from state to state. Generally speaking, if you want to protect an asset, don’t own it!  Strategies can range from the simple professional who puts his or her home in their spouse’s name.  In debtor oriented states like Florida, it could mean owning that residence jointly as tenancy by the entirety, which protects the property from creditors of each spouse.  Titling property correctly is simple and inexpensive.  Of course, once you have transferred that property to your spouse, it may be difficult to get it back!

Traditionally, businesses have conducted themselves as corporations or similar entities, one reason being to isolate the business activity from other assets owned by the business owner.  For instance, if a corporation were to get a judgment against it, the creditor’s only recourse would be against the assets of the corporation.  The creditor would not be able to reach through the entity and get at the other assets of the owner.  This is one of the reasons that our clients traditionally do business as corporations, LLCs or limited partnerships.  All of these entities have the characteristic of limited liability.

However, if it is the owner who is the subject of a judgment creditor, he can lose his stock in his closely held business.  So, consider placing assets in a limited liability company.  Some jurisdictions (not Georgia) provide that a creditor’s sole remedy, with respect to the LLC ownership by a debtor, is to obtain a charging order.  This remedy permits the creditor to stand in line to receive any distributions from the LLC that would otherwise go to the LLC’s owner (the debtor);  but the creditor cannot take the owner’s membership units or foreclose on ownership interest.  This, of course, is not a popular remedy for creditors.  Creditors would prefer to control the ownership interest in the business, allowing them to sell assets or otherwise liquidate the business in order to satisfy the debt.  Charging orders as a sole remedy are a statutory rule in a number of jurisdictions including Florida (for multiple member LLCs) and Nevada (a jurisdiction we find ourselves using more and more for the clients whose primary motivation is asset protection).

Creating a corporation is more expensive than merely titling assets in the name of your spouse.  Forming an LLC is significantly more expensive than forming a corporation.  Forming an LLC in another state is somewhat more expensive on the front end and annually than forming a Georgia entity.  You get what you pay for.

The next level of asset protection brings us to the area of trusts.  Of course, you can form an irrevocable trust for the benefit of another, and if properly drafted, that trust can own property which is protected from the grantor’s creditors.  However, Georgia does not recognize what are referred to as “self-settled” trusts;  one cannot create a trust for his or her own benefit in Georgia and many other jurisdictions.  There are approximately a dozen states that do recognize some sort of self-settled asset protection trusts that can accommodate the grantor as a possible beneficiary of the trusts.  Again, of the dozen or so states that allow what are referred to as “domestic asset protection trusts”, Nevada would have to be at the top of the list.  Domestic asset protection trusts require an independent trustee, meaning that the grantor cannot be in total control of the trust assets, although total control would not have to be given to the third party. Significant management control could be retained by the grantor if the trust agreement is carefully drafted.  These arrangements are significantly more expensive than forming an LLC for asset protection purposes.  Generally speaking, the more protection one seeks, the more expensive it is to set up the structure and maintain it.

Other trusts provide asset protection characteristics.  For instance, it is possible to create a trust for the benefit of one’s spouse, and the assets in the trust would be protected from not only the grantor’s creditors, but also the spouse’s creditors.  The grantor is entitled, in essence, to control the disposition of the trust upon the demise of the spouse.  Again, this arrangement must be carefully drafted, particularly if husband and wife are creating trusts for each other.  Again, the grantor should not retain total control of the trust’s property, so a third party trustee is highly recommended.  These types of arrangements tend to be more expensive than the domestic asset protection trust.   There are numerous other trust arrangements that offer asset protection; the appropriate choice depends on the actual circumstances and objectives.

Trusts can also be established in foreign jurisdictions where the local laws with respect to taxes, statute of limitations and contracts are very favorable as deterrents to creditors.  Again, offshore trusts have been around for hundreds of years.  Popular jurisdictions include the Cook Islands, Nevis, Bahamas, Cayman Islands and a number of other Caribbean island countries.  These trusts have been romanticized for many years. They are most popular with liquid investment assets. These arrangements tend to be the most expensive types of asset protection devices, so they also tend to be rare.

Finally, no one arrangement is absolutely perfect.  Ownership transfers should occur prior to the time a liability or potential judgment appears.  Creditors’ lawyers can always argue that assets were transferred in an attempt to defraud particular creditors, therefore seeking court intervention or set-aside.  However, prudent and timely planning should always be better than no planning, even if the result is that creditors are more receptive to sitting down to negotiate more favorable terms with our clients.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.