Este episodio ofrece un breve resumen de las estrategias esenciales para proteger sus activos en los Estados Unidos. Aprenda a utilizar fideicomisos y otras técnicas legales para evitar amenazas a su dinero en efectivo, propiedades de inversión y juguetes favoritos (ej. barcos, automóviles, etc.). Manténgase informado y manténgase a la vanguardia.

See more videos on asset protection here.

Este es un breve repaso sobre la protección de activos extraterritoriales, centrado en la banca extraterritorial y las jurisdicciones con protecciones contra acreedores. Consulte los enlaces a continuación para obtener un análisis más profundo.

See additional materials on asset protection here.

~ Jeff

This expression is used when the court allows a plaintiff to reach the personal assets of the owner(s), rather than limiting exposure to just the company’s assets.

It has long been the case that American courts protect owners and directors from being sued personally for the negligence or misconduct of their companies.  That protection has been eroded, however, as a result of corporate abuses.

So, as a business owner, what can you do to protect yourself?  After all, you do not want to be sued personally when a business investment goes bad, a customer slips in your store, your company breaches a contract, your employee is negligent, etc.  The place to start is understanding the factors the court considers when determining whether to pierce the corporate veil and make the owner personally liable for damages.

Limited Liability: Relevant Factors

In business litigation, Florida courts focus on three key factors in deciding whether or not to shield owners from personal liability:5

• Was the company controlled by its owner(s) in such a way that it was merely an “alter ego” used for the owner’s benefit,6
• Some sort of improper conduct in either the formation or the use of the corporate form,7 and
• The improper conduct imposed an injury on the claimant.
• Most courts tend to focus the analysis on the second element: “A critical issue in determination of whether the corporate veil will be pierced for imposition of personal liability is whether corporate entity was organized or operated for an improper or fraudulent purpose.”8
• The central issue then becomes identification of the degree and types of misconduct that results in personal exposure. Example of what the court might look for include the following:
  • use of company to evade existing obligations (i.e. defraud creditors),9
  • a perpetual monopoly, or
  • use of company to protect against criminal liability

While understanding the legal standard provides some guidance, the courts have purposefully made the standard broad and somewhat vague.  After all, judges have learned from recent events that business owners and directors can be very creative when it comes to filling their pockets while at the same time covering their hides.

There are few things that offend the public more than seeing a rip-off end with the responsible person sipping drinks on his yacht instead of facing punishment.  Judges and legislators want to avoid that embarrassment.

For that reason, there is some “wiggle room” in the law that allows judges to use their discretion when faced with the scenario. 

Limited Liability: Guidelines

Notwithstanding the current political climate, owners can take certain precautions  with their business practices to minimize exposure. The upcoming parts in this series will delve more deeply into techniques for limiting liability, but here are a few general guidelines for starters. 

Good-Faith Dealings

Owners can limit the risk of personal liability by making good-faith attempts to pay the company’s creditors. This is not to say owners must necessarily pay company bills from their own pockets in order to avoid being held responsible for company debts. Rather, the emphasis is on “good faith.” If there is no perception of misconduct, then the company’s inability to pay its creditor’s should not obviate the liability protection. 

Criminal Activity

Also, be advised that, given today’s political and legal climate, any criminal conduct will likely expose owners to personal liability. Courts are alert to owners filling their personal pockets through unscrupulous means while allowing the company to bear the repercussions.

Commingling Personal and Corporate Finances: “Alter Ego”

The final guideline is for small business owners who are perhaps less careful about separating personal assets and liabilities from those of the business than they could be. For example, it is common for some owners to pay personal expenses with the company credit card or utilize company equipment for personal business, etc., especially when there is just one owner or the owners are a couple. While common, this kind of disregard for the corporate entity can lead to exposure.  This is a key issue, so let’s a moment to understand the rationale behind it.

The court’s concern is that commingling resources may leave the company undercapitalized, so the company may not be an autonomous entity capable of assuming its own liabilities. For example, the company might be unable to pay its debts because the owner improperly spends company funds for personal use. In that scenario, it might be unfair to leave a plaintiff whose suit is against the company without any means of recovery.

One way to alleviate this concern is for the company to maintain adequate insurance, but perhaps the easiest and most cost-effective thing to do is to respect the company’s autonomy and keep personal and business finances separate.

Of course, this short article is meant only to be a broad overview of the topic. There are other factors to consider and a myriad of strategies that can be employed to limit an owner’s personal exposure, which will be the focus of upcoming parts to this series.

If any of the points in this article strike a chord, consider meeting with a business attorney to discuss your particular situation.  Despite the cautionary tales described in this article, when it comes down to it, the burden is on the plaintiff to convince the judge to deviate from the status quo and impose personal liability on the owner/director.  With an experienced business litigator at your side, your chances of avoiding liability are still pretty good.

1 The same protection entails under certain other business forms as well, (i.e. limited liability company).

2 Also known as “disregarding the corporate fiction.”

3 The term “owner,” as used here, encompasses shareholders, directors, and other controlling parties, as the case may be.

4 Under the same principle, plaintiffs can reach assets of other companies belonging to the owner.

5 8 Fla. Jur 2d Business Relationships §13 (2006); Mullin v. Dzikowski, 257 BR 356 (SD Fla. 2000); Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla. 1984); Seminole Boatyard, inc. v. Christoph, 715 So. 2d 987 (1998).

6 For example, where the owner commingles his money with the corporation’s money, or the owner uses corporate property for private purposes. Basically, any evidence that the owner does not respect the corporation as a separate entity could be used to meet the “alter ego” element.

7 Dania Jai-Alai Palace, 450 So. 2d 1114; Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So. 2d 1141, 1151 (Fla. 3d DCA 1995); Ally v. Naim, 581 So. 2d 961, 962 (Fla. 3d DCA 1991).

8 Kanov v. Bitz, 660 So. 2d 1165 (3d DCA 1995).

9 Undercapitalization of the business and/or failing to maintain liability insurance to cover damages resulting from the company’s negligence or intentional wrongdoing are traditionally looked at to determine these first two elements.

~ Jeffrey Harrington, Esq.

It is true the American legal system is set up to shield owners/officers from corporate liabilities, but nothing draws public outcry like an executive who fills his pockets through misdeeds and then hides behind the corporate skirt.  

It is the perception of corrupt business practices with no punishment that leads judges and legislators to weaken corporate protections and put officer heads on the chopping block.

So, in this climate of suspicion, what can a business owner do to limit liability for company activities? in this section, we will focus first on what not to do.

I. Shell Companies

By “shell company,” we mean a company that is set up for specific business transactions but which has no significant assets.  In Florida, where our firm is headquartered, it is extremely cheap and simply to set up a new company.  That is intended to encourage entrepreneurship, which is a good thing.  What is sometimes not a good thing is the ease of setting up a new company also lends itself to creating “throw away” companies.

So, if an unscrupulous person wants to rip people off, he or she can open a company, do bad things and then abandon the company.  And repeat . . .

Judges are wise to this tactic.  If your company is accused of misconduct, a judge will be curious to see how vested you are in the company.  Was the company properly capitalized at the start, or was it run on a shoestring?  There is nothing wrong with running a company on a tight budget, but you do not want it to seem like you were never serious about building a viable business.

Consider other countries around the world, such as European countries, where it is not nearly so quick and easy to start a new company. In fact, the process is rather involved and requires significant capitalization upfront.  This tends to have a chilling effect on startups and, perhaps, reduces the likelihood of abuse.

Of course, many small businesses will be started with minimal capital and grow organically. There is nothing wrong with that. It is one of the things that makes the United States an attractive destination for the entrepreneurial-minded.

If you are starting your company on a small budget, then consider purchasing an insurance policy (such as an “errors and omissions” policy).  Judges tend to view that as a good-faith attempt to be a responsible business owner.

II. Alter Ego

Another important consideration is whether the business owner treats the company as a separate entity, rather than just an extension of himself.  As a small business owner, it is easy to form bad habits — such as using the company card to pay personal expenses, commingling company funds with personal funds, using your personal card to pay company expenses, making company decisions with no semblance of corporate process, etc.  These are very common practices, which Florida courts tend to view as reducing the company to a mere “alter ego.”

Many small business owners think: “What difference does it make? It’s all my money, anyway.”

Of course, there is some truth to that. That is why in business litigation we refer to the “corporate fiction.”  After all, it is a fiction . . . one that you should foster, not disregard.

Think about it this way. If your company gets itself into a situation where it cannot pay its bills or is being sued, then you are going to want to separate yourself from the company’s creditors as fully as possible.  If someone gets a judgment against the company, you do not want him coming after your personal property, your personal bank account, etc.

Should that situation come up, your argument will be “Hey, that is the company’s debt, not mine.”  By and large, that is a good argument, and the courts will support it.  However, you can’t really have it both ways.  If you want the judge to treat your company as a separate entity that is responsible for its own obligations, then you need to have treated the company that wayall along.

More on Business Law

To protect against corporate liability, you want to avoid weakening the corporate fiction. So, you do not want to give the impression that you were planning to “tank the company” all along, and you do not want to make the company your alter ego.

Next week, we will discuss affirmative measures you can take to foster a strong corporate fiction, thereby strengthening your protection against corporate liability.

~ Jeff Harrington, Esq.

The post BUSINESS PRACTICES: Limiting Personal Liability (Part II) first appeared on Harrington Legal Alliance.]]> https://Harringtonandsheppard.com/business-practices-limiting-personal-responsibility-part-iii/ Mon, 05 Feb 2024 21:54:07 +0000 https://www.harringtonlawassociates.com/?p=1406 This is the final part to our discussion aimed at helping owners and officers avoid personal responsibility for the obligations and liabilities their companies take on in the course of doing business. The first part provided an overview of the key issues related to corporate liability. The second part focused on what not to do. Here, we get to proactive techniques for guarding against personal responsibility.

There are still some important benefits to going offshore with your banking, intellectual property, and other assets that you should know about.  Jeff discusses five (5) key offshore jurisdictions, breaking down the pros and cons of each.  (subtitulado en espanol)

Just because you intend to do business primarily in one particular state does not mean that you necessarily have to set up your company in that state.  On the contrary, you can organize your company in any state (or even foreign jurisdiction) and then register that company to do business in the state where you do most of your business.

You have probably heard that large corporations tend to select Delaware as their state of incorporation.  Usually, these companies are not headquartered in Delaware.  In fact, they probably do not have an office in Delaware at all.  So, why have a Delaware corporation if your business has nothing to do with Delaware?  And, does it have to be Delaware, or are there other advantageous “jurisdictions” to consider?

Corporations start up by “incorporating.”  All other forms, such as LLCs and partnerships, start up by “organizing.”  It means the same thing.

That is why the governing document for a corporation is called “Articles of Incorporation,” while the equivalent document for other companies is called “Articles of Organization.” 

Tax Implications

Let’s start by dispelling a common misconception.  It is true that some US states charge income tax, while others do not.  However, you should not be under the impression that you can avoid state taxes merely by setting up your company in a state that has no income tax.  That would be a fatal mistake.

Corporate taxation is determined by where the money is generated, not by state of incorporation. 

So, for example, if your company’s office is in California, and you sell widgets to Californians, you cannot escape state taxes merely by organizing your company in Nevada.  If only it were that easy, right?  You can be sure that many, many people have tried to do just that.  And, when the Department of Revenue catches on . . . well, it’s not pretty.

Therefore, when determining the jurisdiction for domiciling your company, tax implications should not be a primary consideration.  If you are going to try to escape state taxes by setting up in a different state, you do so at your own risk.

Confidentiality

This is one of the big differences among the different jurisdictions.  Just how easy is it for the public to see your business and personal information?

Transparent States

Some states, such as Florida, are extremely transparent.  A good deal of business information, including owners’ names and addresses, are easily accessible online.

For lawyers, this is very useful.  When we need to sue a company, we just go online to the Department of State’s website (www.sunbiz.org), and we can get most, if not all, the information needed for the lawsuit right there.  It’s great.

On the flip-side, however, this transparency may not always be the best from an owner/officer perspective.  Besides making it easy for lawyers to prepare lawsuits, Florida companies also open themselves up to “trolls.”

If someone wants to find out whether you have enough assets to be worth suing, they can do a quick search online and see all the ventures you have going in Florida.  Similarly, if you have neighbors or family members that might be prone to jealousy, they can also easily find out what you have going on financially.

This “concern” is very situational, of course.  For many small business owners, having your information in the public record may be of absolutely no consequence. 

In that case, just go ahead and organize in the state where you are doing business.  That is the simplest and most convenient thing to do.  It will simplify setting up company bank accounts, minimize the need for a professional registered agent, etc.  It’s just easier.

Privacy-Conscious States

There are a number of states that are much more protective of a company’s confidential information.  If you go to the State Department’s website in one of these states, you will be able to see that a company exists.  In some cases, you may even be able to see whether the company is currently active.  But, that is about it.  No other corporate information will be available to the public on those websites.

Most of the states in New England tend to guard corporate information, as do the common “asset-protection” states, such as Wyoming, Nevada and Alaska. 

Again, what is best for individual business owners is situational, but an argument could be made that it is really a better business practice to set up in a state that will protect your company’s confidential information.

There is a bit of a trade-off, however.

Registered Agents

If you are going to set up your company in one state, but then do business in another state(s), you will need to hire a registered agent in the state of incorporation/organization.

Example:  You live in Florida and plan to do business in Florida, but you want to incorporate in Delaware.  At the time of incorporation, you will be required to provide a “registered agent” that has a physical location in Delaware.   So, unless you have a buddy in Delaware that is willing to act as registered agent for your company (not a great idea, by the way), then you will have to hire a professional registered agent in Delaware.

The purpose of a registered agent is to receive official documents on behalf of the company, such as lawsuits, governmental correspondences, etc.  Registered agent services are not particularly expensive (less than $100/year is common), but it is an extra step.

Double Registration

Continuing the example above, hiring a Delaware registered agent is not the end of the initial set up.  Since you are planning to do business in Florida, you will still need to register your Delaware company as a “foreign company doing business in Florida.”

If you live in Florida, you have the option of acting as your own registered agent (also not a great idea), so you do not necessarily have to hire a professional company for those services.  Still, you will need to maintain two registrations in two different states.  So, that too is an extra measure.

Thankfully, in the US, all states make it relatively easy and inexpensive to register a business.  The biggest thing is remembering to file annual renewals in both states and keeping the registered agent paid.  If you miss a renewal deadline, your company will be “inactive” or, even, “dissolved.”  And, to reinstate, there is usually a fairly nasty penalty ($400-600).

Asset Protection States

The main reason big corporations have traditionally incorporated in Delaware has to do with the governing statutes.  First of all, Delaware is the state with the most extensive case precedent when it comes to business matters.  That is advantageous because it prevents surprise.

Since almost every corporate situation you can possibly imagine has been litigated at some point in Delaware, you know ahead of time where the Delaware courts stand on all essential issues.

The predictability of Delaware courts is valuable to companies, especially those doing business on a large scale.

Second, the Delaware laws have traditionally been owner/officer/director friendly.  At some point in history, Delaware made conscious decision to be protective of owners/officers/directors in order to encourage companies to incorporate in Delaware.  It worked.

Simply put, Delaware law makes it more difficult to impose personal liability on owners, officers and/or directors for the bad luck, negligence or, even, misconduct of their companies. 

Owners, officers and directors are the decision-makers for their companies, and they like the protection.  So, everyone flocked to Delaware.

Now, because Delaware has been so successful at attracting businesses, certain other states have basically adopted the same laws.  They don’t even try to be subtle about it.  If you look at the case law, you will find judges openly stating “we follow Delaware law.”

As a result, these days, it is no longer necessary to set up in Delaware in order to get the benefits traditionally associated with Delaware.  I refer to the group of states that actively vie for your company’s business through these kinds of incentives as “asset protection states.”

Best Jurisdictions

Delaware

Naturally, you cannot go wrong with Delaware.  The only drawback is that it is a little more expensive than the competition.  At this point, Delaware sees itself as the “gold standard,” so you have to pay a little more to be there.

Nevada

The first state to aggressively compete for corporate filings was Nevada.  I think Nevada wanted to establish itself as the “Delaware of the West.”  And, it was largely successful in this regard.

Progressive states like California and Washington tend to offer more protections to consumers and employees, and less to owners/officers.  So, that created a great opportunity for Nevada to set itself up as the closer-to-home alternative to Delaware.

Unfortunately, Nevada, your recent overhaul of your Corporate Divisions website, and accompanying fee hike, is a disaster.  Your system has become terribly frustrating to deal with.  Even your own employees hate it.  On top of that, you decided to start charging more???  No, I’m out.

Wyoming

These days — at the moment, at least — my favorite asset-protection state is Wyoming. 

Wyoming has a simple, user-friendly online system for registering companies, and the fees are cheaper than the other jurisdictions I have looked at.  Also, you can get a human being on the phone when you need one, and the human will be nice to you.

As for asset-protection, Wyoming staunchly adheres to Delaware law, so you get the same liability limitation features in Wyoming as you would in Delaware.

Other Options

I know from my research that there are some other good options out there as well, most notably Alaska and South Dakota.  I am sure they are lovely.  I just have not had a lot of personal experience with these other jurisdictions.

~ Jeff Harrington, Esq.

Previously, we looked at 10 advantages of a land trust [Florida land trust].  The purpose of that article was to make people aware of the possibilities with this truly useful vehicle through analysis of an LLC vs. Land Trust.

I find that clients who are unfamiliar with trusts will almost invariably decide in favor of an LLC.  When it comes down to it, clients would rather go with an inferior solution they understand than something that sounds exotic or too good to be true.

That’s understandable.  So, let’s increase awareness.

LLC vs. Land Trust

When viewed side-by-side with an LLC, I think you will find a Florida land trust is not such an exotic creature after all.  Part of the problem may simply be vocabulary.  Juxtaposing equivalent terms may provide real estate investors with a better understanding of, and greater comfort level with, land trusts.

Limited Liability Company (LLC) vs. Land Trust

LLC  –  OWNER/MEMBER

The person who puts in the time and start up capital to launch a limited liability company is usually referred to as the “member” or “manager.”  Owners will often use additional titles such as “president” or “CEO” because they are more commonly recognizable.  There is a technical difference, which we will get into a bit below.  For now, the point is that limited liability companies have “owners.”     

Land Trust  –  GRANTOR

In simple terms, we can say the “grantor” of a trust is equivalent to the owner of an LLC.  There is such a thing as a “non-grantor trust,” but, for a simple land trust, the grantor is the one who sets up the trust, just as an owner sets up an LLC.  

There is one difference worth mentioning.  Trusts were originally designed for estate planning.  So, the trust will have a “beneficiary(s),” such as the grantor’s children or wife, for example.  One common set up is where the grantor takes the profit/proceeds generated by the trust during the grantor’s lifetime and, after the grantor dies, the assets of the trust go to the beneficiaries.  

This simple set up adds an estate planning feature to the land trust that you do not get with an LLC.

LLC  –  OPERATING AGREEMENT

The Operating Agreement contains the company’s bylaws.  Along with the Articles of Organization, the Operating Agreement provides the key terms that govern the company.  For example, that is where you will find provisions about decision-making authority, election of officers, dissolution of the company, etc.

It is possible to do a bit of succession planning with an operating agreement, such as naming a successor president.  There is a limit to how far you can plan succession with an operating agreement, though, because it just gets weird.  You soon run into family scenarios that seem out of place in a business document.  

Judge’s do not expect to see a bunch of estate planning provisions in a company’s operating agreement — i.e. healthcare, custodial duties, rights of heirs, etc.  So, it is uncertain whether those provisions would be enforced by a court.   

Trust  –  TRUST AGREEMENT

The equivalent of an operating agreement is the “declaration of trust” or “trust agreement.”  (same thing)  The trust agreement has provisions similar to those of an operating agreement about management of the trust’s business affairs.  The difference is that trusts are typically used for estate planning, so you can readily include provisions regarding heirs, healthcare, funeral arrangements, guardianship, and  other things you would normally expect to see in a will.  There is nothing weird about estate planning through a trust, so you can be sure a judge would indeed enforce those provisions.  

If you are using land trusts strictly for real estate investment, you will probably use a straight-forward business trust, which will not likely have much estate planning to it.  But, should you so choose, you can get double-duty out of a trust agreement in a way you cannot with an operating agreement.

LLC  –  PRESIDENT/CEO

Entities cannot speak for themselves or sign documents, so they have to be represented by one or more human beings.  For this reason, a  president and/or other corporate officers are named to act on the company’s behalf.  

Often, the president is the owner of the company, but that is not necessarily the case.  The president could simply be an employee who has no ownership interest.

Trust  –  TRUSTEE

Like the president of a company, the “trustee” acts as the representative of the trust.  Many times the grantor will act as the trustee.  In that case, the trustee is for all practical purposes the “owner” of the trust.  There is some flexibility here, though.  There can be situations where the grantor would not want to be the trustee, just as an owner of a company may not want to be president.

If asset protection is a concern (when is it not?), then the grantor should appoint someone else to be the trustee.  Or, if it is not convenient for the grantor to run the operations, it may greatly simplify things to have a local person act as trustee.  Likewise, if the grantor wants a smooth transition when he/she dies, then using someone else as trustee — or naming a successor trustee — is an excellent solution.

You can name anyone you want as a trustee, though there are some good reasons to make it an attorney, accountant, or trust company, rather than a friend or family member.  That is a topic for a different article, though.

LLC –  EMPLOYEES & CONTRACTORS

Obviously, these are the workers who carry out the company’s business activities.

Trust  –  EMPLOYEES & CONTRACTORS

A trust can also employ workers, though that would not be common for a land trust.  Usually, a trust will hire outside companies or contractors to manage properties, provide maintenance and repairs, invest trust funds, etc. 

LLC  –  PARTNERS

Naturally, you can have more than one owner (i.e. partners) and divide the ownership interests however you decide. 

While it is common for partners of the LLC to have different percentages of interest in the company, or to have different voting rights, it would not be common to stipulate to much more than that.  

Trust  –  BENEFICIARIES

The beneficial interest given to the beneficiaries of a trust is similar to ownership interest divided among partners in an LLC.  You do, however, have much more control over beneficial interest.  You can name as many beneficiaries — and their successors — as you want, and you have complete control over _

• • how much they receive
  • how they receive it
  • when they receive it
  • what conditions must be met
  • who you want to act as custodian, if a beneficiary is a minor
  • skipping generations

That is probably far enough for now.  You can read about cost savings and flexibility of land trusts here.

For now, the purpose is to understand some of the inner workings of a land trust and realize it is not so entirely different from an LLC .  There is nothing particularly exotic about a land trust.  Just the terminology is different.

And, where there are differences, the land trust has the advantage.

 ~ Jeff Harrington, Esq.

In our firm’s international practice, we work with Europeans and South Americans, whose legal codes essentially disallow (or disregard) the concept of a trust. It is sometimes hard to explain to such clients the advantages of a trust because it just sounds too good to be true.

Q: So, you’re saying I can put my assets into a trust and no creditors will be able to touch them?

A: That’s right. The trust has to be set up in a particular way, but you certainly protect your assets from creditors through the use of a trust.

Q: Can I still control and have access to my assets even though even though they belong to a trust?

A: The simple answer is “yes.” The full answer will be part of the upcoming article on asset protection trusts.

Q: When I die, my estate does not have to go through the probate court if my assets are in a trust?

A: That’s correct. Your beneficiaries do not have to wait for a court order, and your estate will not be depleted by court costs and legal fees.

Q: I don’t want a money grab when I die. With a trust, can I control precisely who gets what, when and how?

A: This is one of the major advantages of a trust. Having a will is certainly better than nothing, but a will certainly cannot give you the kind of control a trust can.

Q: What about in-laws? I want to protect my heirs from their spouses and their spouse’s family.

A: There are some situations, such as with homestead properties, where the use of a trust is the only way to accomplish this goal.  [ Read more about homestead rights and trusts here]

Q: Can I make sure my loved one with special needs is taken care of?

A: Yes. In fact, there is something called a “Special Needs Trust” that is designed specifically for this purpose.

Q: I am concerned about losing my medicaid benefits. Can I use a trust to avoid that?

A: Yes. There is a particular kind of trust commonly used to protect medicaid and other government benefits.

Alright, so you can see there are many advantages to incorporating a trust in your estate planning.  But, what is a trust?

I tell clients they can think of a trust like a company.  That is not a great analogy, but it does at least help to think of the trust as an entity that is separate from you personally.

Your trust may be your alter-ego, but it is not you.  And, that is the key feature that makes the trust so useful.

Since the trust is not you, then the assets that belong to the trust are just like assets that belong to a different person. [ Caveat: The trust must be set up in a specific way for this to work. ]  So, the trust can be used for asset protection.  That is, even though you may personally be subject to collection by a creditor, your trust is not.

More on Asset Protection

More on Asset Protection

The same is true for avoiding probate.  Even though you will die, your trust will not.  In that sense, it is like a company.  The trust will live on, and the trustee will continue to carry out the instructions you leave in the trust agreement.  For that reason, there is no reason to subject your estate to the court system for probate.  Everything that you put in place with your trust simply carries on after your death.

As mentioned, there are some ways in which a trust is not like a company.  In reality, most of those differences come down in favor of the trust.  In other words, in most ways, a trust is actually better than a company.  Here is an article that compares and contrasts the features of a trust to those of an LLC.

Trust vs. LLC

Click Here

The next article in this series describes what it means to “put assets into a trust” and exactly how to do so.

Later articles in this series will explore a few of the most common types of trusts used for estate planning, such as a living trust, as well as common strategies, such as a Pour-Over Will & Trust combination.

Stay tuned.

~ Jeff Harrington, Esq.

 “Your trust may be your alter-ego, but it is not you.”  – J. Harrington

I. Asset Protection

Let’s say you have the resources to buy a house but there is some reason you do not want your name on the title to the property.  Maybe there is a risk of creditors finding out and forcing the sale of the property to pay back a debt, or one of many other reasons for wanting to keep your involvement confidential.

When it comes to asset protection, there is a wide spectrum of techniques, ranging from the very simple to the very sophisticated.  Using someone else’s name is pretty much the bottom rung.

More on Asset Protection

Using the name of a family member or close friend is quick, easy and cheap.  There is no need to involve an attorney or set up any kind of entity (i.e. LLC or trust).  The allure is undeniable but . . .  there are some drawbacks.

 II. The Double-Cross

The obvious risk is the possibility that the person whose name you use will decide to keep the property.  If that happens, there probably will not be a whole lot you can do about it.  After all, for legal purposes, the property belongs to the person who is on title.

You will need to file a lawsuit and present all the evidence that you actually paid for the property and that, in equity, you are the real owner.  Maybe you can convince the judge . . . but, then again, the purchase could simply be seen as a “gift.”  How are you going to overcome that argument?

Believe it or not, my firm is dealing with a case right now where the mother is trying to double-cross her own son in just this way.

Let that sink in.

III. Spouses & Heirs of the Person on Title 

Naturally, you will carefully select the person whose name you are going to use, so maybe you think a double-cross is unlikely.  After all, this person is a loved one.

Your own mother is going to steal your house, right?  Okay, but what happens when your mother re-marries and your new step-father has ideas?

It actually is not all that common for clients to complain of the trusted person betraying them, even though fallings out are certainly a part of life.  It is much more common, however, to hear stories about problems with an in-law or the heirs of the trusted person.  After all, it is not up to you whom your relative marries, or when he/she might die.

When this situation comes up, there are at least two negative consequences.  First, your asset is exposed.  You could very easily lose it.

Second, your trusted person is caught between two opposing forces — both loved ones — just for doing you a favor.  

In that deal, all the people you care about lose.

IV. Creditors of the Person on Title 

Don’t forget that, while you might put the asset out of reach of your creditors, you are exposing the asset to the creditors of the person whose name you use — that includes past, present and future creditors.

Are you going to diligently monitor the trusted person’s debts on an ongoing basis?  Do you really know everything in that person’s past?  And, what about unexpected circumstances like an accident or bankruptcy filing?

The debt your house ends up paying for might not even be something voluntarily acquired.  For example, if your trusted person is at-fault in a car accident and there isn’t enough insurance to cover the damages, you can bet the injured party will be going after any and all assets your trusted person has.  At that point, it’s too late to transfer the property out of the trusted person’s name.  (You can try, but it probably won’t work).

And then there is bankruptcy.  Try explaining to a trustee that the home doesn’t really belong to the bankrupt debtor.  Good luck with that.

The trustee’s job is to marshall all assets available to pay creditors.  Even if the trustee is sympathetic — which she probably will not be — she has to do her job.  Expect no mercy.

V. Borrowed Credit

The other common reason a home might be titled in the name of someone other than the person paying is lack of good credit.  That might be a little more understandable . . . though still fraught with peril.

You probably have to come up with a sizable down-payment, so it’s not like you don’t have anything to lose.

Now, if the only way to get the property is with someone else’s credit, then my only suggestion would be to have your trusted person as a co-signer rather than the person on title.

Since the home is financed, then your exposure is limited to the equity in the property.  Now, with property values on the rise, that equity could be a large amount of money.  So, I’m not saying the risk is nominal, but at least you will not lose the entire investment.  I guess that is something . . .

You could build in some additional protection by including your name on the title and/or registering the property as a homestead.  And, you could have the trusted person name you as the beneficiary of the property in his/her will or trust.

VI.  Morale of the Story

These common practices are just not smart, folks.  There are better ways to accomplish your goals.  And, that is why God made attorneys.

When it comes to asset protection , setting up a trust is a much smarter way to maintain confidentiality.  You can easily avoid the pitfalls described above.  Yes, it will cost a little bit of money, and you will need an attorney, but we are talking about a significant investment here, right?

We hear sad stories in our office every day.  Would you rather pay your attorney a little bit at the outset or a lot later on when something goes wrong?

~ Jeff Harrington, Esq.

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