incorporate to protect assets?

[TallCotton]

ER is on my horizon.

Has anyone placed there material/cash assets into some other entity, whether Trust, Corporation, Company, or ? in hopes of avoiding losing everything if something happens.

I can imagine somehow becoming very much in debt because of a health issue or a lawsuit or something, then claiming bankruptcy to eliminate the debt while still retaining all assets.

TC

 

[LovesLife]

I carry a personal liability policy of 1M on my homeowners and car insurance policy.

 

[retire@40]

Family Limited Partnerships work well to protect your assets.

 

[JR Ewing]

I have the big liability insurance policy. Family Limited Partnetships only work if you have a family and if it's not The Sopranos or the Ewings of that old TV show with Larry Hagman.

Incorporating doesnt really protect assets. It's magic is worked if you are in business and have employees. If the driver hits somebody they can only come after the business and the driver but not YOU. If YOU are driving the delivery truck well... they can go after the buisness AND YOU personally. I looked into this more than once over the yrs and I just didn't see where "incorporation" amounted to a bucket of warm spit

If you want to protect your "eatin' money"... if I am not mistaken annuity payments are normally protected from judgement in lawsuits. OJ Simpson's football player pension was not up for grabs in his civil suit, just his bank account. This might vary from State to State though.

As far as protection from ringing up big bills (medical or otherwise) I dont know if that is ultimately possible. You owe? You owe! You declare brankruptcy? That's nice but you're supposed to be actually bankrupt. Like any other bankruptcy I suppose your situation would be negotiable and "arrangements" can be made

 

[retire@40]

Family Limited Partnetships only work if you have a family and if it's not The Sopranos or the Ewings of that old TV show with Larry Hagman.

Ya, I guess that's why it's called a "Family" Limited Partnership, and ya it's got to be family that is expected to get along for the long term (at least the general partners who are usually the mother and father). But if you've got those two elements, it beats an insurance policy any day.

 

[wzd]

I am not so sure. I researched this a few years ago and came to the conclusion that it was more hype than substance. I would check with an attorney not selling the packaged systems before doing much along these lines. (Family limited partnership that is). LLC's do provide protection from liability, and I have one for my rental property. Yes, I can still be sued, but they have to prove negligance, not just culpability, on my part to win.

Maybe Martha can toss in her legal opinion on this thread?

 

[retire@40]

I am not so sure.  I researched this a few years ago and came to the conclusion that it was more hype than substance.

I'd be curious to know the facts upon which you based your conclusion.

 

[John Galt]

I owned a manufacturing company which has morphed into a PHC (personal holding company). It worked out well for me, but doubt if I would have set one up in ER
if it had not already existed. I like to keep things simple
and any sort of corp. doubles much of your recordkeeping. Also, the tax implications can get messy.

JG

 

[Martha]

Since wzd asked so nicely , I will throw my two cents in.

When "something bad happens" for which you are personally liable (like don't pay a big medical bill or have a car accident where you are negligent) creditors are entitled to seize and sell your non-exempt assets to pay the debt. The questions are (1) is what they want to seize your asset? and (2) if so, is it exempt under state or federal law from seizure?

It isn't very easy to give a short answer as to how to minimize what are your assets and how to maximize what is exempt.
I can give some examples. If you are married and vulnerable to possible creditor claims, you and your spouse might want to keep your assets separate. (There are complications to this, especially in community property states). You might want to gift over time to children. Things like corporations and LLCs are suitable if you are running a business, but the corporate shield reallyonly protects you from trade debt and debt you don't personally guaranty, not the consequences of your own negligence. That is why the posts concerning insurance make absolute sense. Family limited partnerships are in a state of flux right now because of estate tax issues and some adverse decisions on the estate tax front coming from Texas. If you retain no interest in the family limited partnership, you don't have anything for a creditor to take. But if you retain an interest, that interest is vulnerable.

I could go on and on with this because there are many complications. For example, if you end up with a big judgment against you and at that time you own only a limited partnership share in the family limited partnership, a creditor could try take and sell that interest but might have difficulty in doing so as a practical matter.

What is exempt is exempt from seizure is primarily a matter of state law with some federal twists. I have talked a lot about how ERISA protects 401(k) plans. Some states are very generous on protecting other retirement assets, some are stingy. Some states are very generous on protecting the homestead (Texas, Nevada, Florida . . . ) and some are very stingy.

Martha

 

[Martha]

Re: bankruptcy

To add to my previous post, if a person ends up with a debt he cannot pay, he may or may not file bankruptcy. If a bankruptcy isn't filed, the creditor can seize non exempt assets and guarnish wages to collect the debt. Sometimes creditors have an option of filing an involuntary bankruptcy but it is rare and usually is done only if there are a number of creditors competing for assets.

Many voluntary bankruptcies are filed because wages are guarnished and the debtor can't pay his or her regular bills. Bankruptcy stops the guarnishment. On the date the bankruptcy is filed, whatever assets the debtor owns becomes property of the bankruptcy estate. A determination is made as to what is exempt. Debtor keeps the exempt assets. The bankruptcy code provides for a set of federal bankruptcy exemptions, but your state can decide to opt out of those exemptions and require you to use their state exemptions. Most states let you pick either the federal exemptions or the state exemptions.

What is not exempt (and has value) is sold by the bankruptcy trustee. The trustee can also abandon assets back to a debtor if the asset is burdensome to the estate.

Secured creditors after the bankruptcy is over can repossess their collateral or enter into a reaffirmation agreement with the debtor where the debtor keeps the asset and continues to pay the debt.

This is the basics of chapter 7 or "liquidation" bankruptcy. Most debts are discharged at the conclusion of the bankrutpcy, except for most tax debt, most student loans, child support and alimony, and debt where the creditor proved in the course of the bankruptcy case that the debt cannot be discharged. Usually, this is for debt incurred by fraud.

Other options for individuals besides chapter 7 are chapter 13 and 11. Chapter 13 is where a plan is done to pay a portion of debt over time. Only those with a regular income can file 13 and there are debt limits as well. Chapter 11 generally is for business reorganization but can be used by individuals. Rarely successfull and very expensive.

Martha

 

[retire@40]

If you retain no interest in the family limited partnership, you don't have anything for a creditor to take.  But if you retain an interest, that interest is vulnerable.

I could go on and on with this because there are many complications.  For example, if you end up with a big judgment against you and at that time you own only a limited partnership share in the family limited partnership, a creditor could try take and sell that interest  but might have difficulty in doing so as a practical matter.

It's my understanding they can't sell your interest in your share of the FLP. Under a charging order they can only claim credit to the income from your share of ownership. But no income needs to be paid out to them. They only receive a K-1 form indicating they have to pay taxes on income they may never receive. Since winning in this case means paying taxes on phantom income, a creditor would not continue the lawsuit. Thus, the assets are protected which is what the original poster asked.

 

[Martha]

Not quite right, retire@40. A family limited partnership is just a limited partnership of family members. Whether a creditor can take a limited partnership interest is mostly a function of state law and the states I am familiar with do not provide any special protection for those interests. People try to draft the agreement in a way to try to prevent creditor attack, but those provisions might not serve to prevent a creditor from seizing the interest, especially if it is the interest of the party who originally set up the partnership. Bankruptcy trustees argue they are not bound by these limitations because they simply step into the shoes of the debtor. A lot of the FLP agreements I have seen provide for a buyout at a certain amount if a creditor tries to seize a partner's interest.

But back to the practical problem. A creditor or bankruptcy trustee may have little incentive to go after the partnership interest because it doesn't yield any cash distributions. However, I would question whether the partnership interest could be treated differently than other partners interest, so if the creditor had phantom income, so would the other partners. Also, sometimes simply having the complicating layer of a partnership can be daunting to a plaintiff lawyer who isn't familiar with what can be taken to satisfy a judgment. But as a bankruptcy lawyer and former trustee, I would feel free to attack.

Also, I would look at why the FLP was set up and when. If it was set up to avoid paying creditors, I would argue that the entire FLP was void as a fraudulent transfer and I would sue all the partners to get all the FLP assets.

A bankruptcy trustee can be your worst nightmare.

 

[Martha]

BTW, since I am in wild attack lawyer mode, if you try to set up an offshore trust to hide your assets from creditors, I will sue you to force you to undo the trust and if you don't I would ask the judge to hold you in contempt of court. You can sit in jail until you unwind that foreign trust. Or, if I am feeling more generous, I might seek to have your bankruptcy discharge denied for hiding assets from creditors.

So there.

 

[MJ]

BTW, since I am in wild attack lawyer mode, if you try to set up an offshore trust to hide your assets from creditors, I will sue you to force you to undo the trust and if you don't I would ask the judge to hold you in contempt of court. You can sit in jail until you unwind that foreign trust.

Martha,
Wow. A real barracuda.
I think I'm in luv.

MJ

 

[Nords]

BTW, since I am in wild attack lawyer mode...

I wasn't aware that lawyers operated in any other modes!

 

[John Galt]

I went through a Chapter 11 bankruptcy of the company I
was running in 1978. I didn't have much trouble with
the trustee appointed by the court, but I can see
(as Martha put it) that the trustee could be your
"worst nightmare". Oh, and I also agree with her that
Chapter 11 is quite expensive and rarely successful
(by successful I mean that the company filing survives).
Last stats I saw put the survival rate at around 10%,
so that option really should be a last resort.

JG

 

[Hyperborea]

BTW, since I am in wild attack lawyer mode, if you try to set up an offshore trust to hide your assets from creditors, I will sue you to force you to undo the trust and if you don't I would ask the judge to hold you  in contempt of court.  You can sit in jail until you unwind that foreign trust. Or, if I am feeling more generous, I might seek to have your bankruptcy discharge denied for hiding assets from creditors.

Yeah, I've run across a lot websites discussing these for use by US citizens when I've been searching for legitimate offshore brokerages for non-US citizens.

What happens if the foreign trust is "unwindable" - a one way door legally in the jurisdiction that it is set up in?  Or even if once you as a lawyer for a creditor find out about it and contact the original trustee that the trust is automatically forwarded on to another jurisdiction?  These seem to be some of the common "protections" that these sites tout.

 

[Martha]

Hyper, if the trust can't be unwound, then you might get out of jail on a civil contempt order because of the impossibility of complying with the contempt order. However, I could ask the judge to sentence you to a period of time to spend in jail for criminal contempt. Also, bankruptcy discharges have been denied in these very circumstances. So you continue to owe your debts.

Those of us in the trade believe that off shore trusts are very very risky because you can get yourself in a jam you can't get out of.

 

[John Galt]

I agree with Martha. I looked at this pretty seriously once.
Every way I turned I saw trouble. I get into enough
trouble without going around looking for it

JG

 

[Hyperborea]

Those of us in the trade believe that off shore trusts are very very risky because you can get yourself in a jam you can't get out of.

Martha, thanks for the info.  It's mostly of the interesting to know type of information.

I am thinking about setting up a company or a trust in an overseas location once or just slightly before I retire to hold our assets but as an estate planning measure rather than bankruptcy protection.  When I retire I will no longer be a US resident (nor a citizen) and so any assets I have in the US such as stocks that trade on US exchanges will not neccessarily pass tax free to my wife (nor conversely from my wife to myself).  If all the assets are owned by the company or trust in another country then on the death of myself or my wife the only asset changing hands would be half ownership of a non-US trust or company and so no US estate taxes would be owed.  I've still got a lot more planning on this to consider. Any pointers?

 

[Martha]

Hyper, your estate planning/tax planning issue is out of my realm of experience. No hints for those non-US residents who run the risk of estate taxes here.

 

[Bob_Smith]

So Martha, what can a married couple do to minimize the risk of creditor's seizing assets besides continuing to hold assets in 403(b)s and 401(k)s?

--You mentioned keeping assets separate. Right now we hold all our assets jointly, primarily due to ease of transfer upon the death of one of us. If we split our joint assets, would my wife's half be protected if I were sued? Could you expound a bit on that? Are there downsides we should be aware of?

--What's your thinking on home/auto umbrella policies? Definitely yes? Maybe?

--Anything else the average, run-of-the-mill couple should consider?

Thanks. This is a very interesting and helpful discussion.

 

[Martha]

Bob, it is far easier for me to say what might be problematic strategies rather than give thoughts on what actually might work.

First off, my DH and I hold our assets jointly. I decided our risks of being sued individually do not outweigh the advantages and simplicity of joint ownership. We have good liability insurance with a two million dollar umbrella. I have good malpractice insurance.

When we had rental property, we held each property in a separate LLC. This provided at least some liability protection.

In contrast, I have a married couple as clients who both are involved in separate business ventures with separate risks. They keep their assets separate so if one loses everything, the other won't as well. They are Minnesota residents which is not a community property state. Therefore, neither is lliable for the business debts incurred by the other. If you consider holding assets separately, there are complications based on whether a state is a community property state and whether the state allows tenancies in entireties. Oddly, in some community property states a person can be liable for the debts of the other spouse unless certain formalities met, no matter how title is held.

Retire@40 mentioned family limited partnerships. I pointed out that they are not neccessarily bullet proof. However, it does provide a layer of protection. I believe there really needs to be a legitimate business purpose for the FLP. It is not a proper vehicle for your house and vacation home. Nevertheless a number people use FLP and LLCs to move assets such as vacation homes slowly to the next generation by giving gifts of interests in the FLP/LLC each year. This strategy is vulnerable to attack because of the lack of a business purpose. However, FLPs and LLCs can be decent vehicles for moving business assets to the next generation. However, there are often better ways to transfer businesses to the next generation, such as though basic corporations with voting and nonvoting stock.

It is helpful to know your own state's exemptions. For example, I believe that there currently is an unlimited homestead exemption in Kansas, Florida, Iowa, South Dakota and Texas. In those states, certainly don't transfer your home to a trust or any other vehicle as you might run the risk of losing the exemption. I would pay off a mortage on that home before ever paying off debt on a cabin or other non-exempt property.

Other states don't have a specific homestead exemption or a stingy one, so you should think about ways to try to protect the home in those states. States that come to mind which are problematic include DC, Delaware, New Jersey, Maryland, Pennsyvannia, Rhode Island, and Ohio.

One option to look at is a trust. If a trust is revocable, it isn't going to do you any good. However, if you set up an irrevocable trust you lose an element of control.

One problem with giving the next generation an interest in your assets before you are gone is that the next generation may have their own creditors. I was trustee in a number of bankruptcy cases where mom and dad put their home in a life estate with their children having "equitable" title to the land. I was always able to recover something for that child's interest and in fact, there are tables to value that interest based on the parents' life expectancy. Also, divorces by the children can cause a number of problems due to claims by exspouses.

Other advice gained from 20 years of bankruptcy experience:

Don't go bare on insurance unless you have nothing to lose
Don't guaranty the debts of your children
Don't be enticed by the pleasures of gambling
Don't borrow money from your retirement plan
Pay your taxes no matter what
Pay your child support no matter what
Pay your credit cards in full each month
Pay off your house
Live below your means
If you are a risk taker, try to position yourself so you don't take your family down with you if things don't work out

 

[Martha]

I didn't really expound much on Bob's question about liability of one spouse for the debts of the other. This again depends on state law. Minnesota law provides that a spouse is only liable for necessities of life of the other spouse. There is a lot of dispute as to what "necessities" are. For example, one area of dispute is whether you are liable for unpaid medical bills of your spouse. Medical costs seem like a necessity to me. However, if my husband is driving a car owned only by my husband, and he has an accident resulting from his negligence, I would not be personally liable for his debt. Therefore, there is some sense in holding assets separately.

However, in some community property states, no matter how title is held, all marital assets are owned by the "community". If one of the spouses incurrs a debt, the other and the other's property might be liable for for the debt, even if they had no involvement in incuring the debt and even if it wasn't for a necessity.

In community property states it is a good idea to have a marital property agreement to try to shield at least some assets from claims of creditors of one spouse.

I was a trustee in both Minnesota and Wisconsin. In Wisconsin (a community property state) on occasion I would seek assets from the nonfiling spouse of a bankruptcy debtor.

I'll shut up now.

 

[TallCotton]

I just checked in since posting my question, and WOW. I guess I picked something worth talking about. If I understand what I've read the advice I am given is to get an umbrella policy to give those creditors something to get instead of my house and other assets. But what's to say they would want to stop at 1 or 2 mil in the policy. Why not go for everything this poor sobs' got?

I remember a business owner in MI many years ago who owned a business that began to go under. This owner created a new business and borrowed all the remaining money in the going under business. He kept the gone under business alive in name only. When his second business failed and he claimed bankruptcy, the rules said he had to pay back his debts as he could. The second companies' first debt, and therefore the one that got paid back first was the debt to his former company. This stategy saved his ass. this is how I heard it anyway.

I've read some things about equity stripping and cross-collateralization. feelings on these?

TC