The way most people title their assets does little to protect them in the event of a legal judgment. The three worst ways to own property, from an asset protection point of view, are in your own name, joint ownership or in a partnership.
Owning assets in your name. The main advantages include simplicity and flexibility but you have absolutely no protection from a lawsuit.
Joint ownership of assets. Joint ownership actually increases your risks of fallout from a lawsuit. For example, if you own a rental property with your friend and he receives a judgment unrelated to the apartments, his creditors could force the sale of the property or become your partner…their choice! If they choose to force a sale of the apartments, you will receive your share but the timing of the sale could produce poor results.
Owning assets in a partnership. Owning assets in a partnership may increase your liability exposure even more than ownership in your own name or joint ownership! This is because in a partnership, it’s possible for you to be held legally responsible for the misdeeds of one of your partners! Not only could the creditor take his share of any partnership assets, but they can come after your share of partnership assets as well. Under certain circumstances, the creditor can breach the partnership and seize personal assets.
The solution is to rethink how you hold title to your assets. While you have a number of good options, perhaps the best choice is what is called a Limited Liability Company or LLC. LLCs are easy and inexpensive to set up and easy to maintain, and are treated as a separate entity or ‘person’ from a legal perspective. This means that assets held within your LLC is segregated from other assets and cannot be seized by creditors with a judgment not related directly to that LLC. Alternatively, if there is a judgment related directly to that LLC, while the LLCs assets are exposed, assets outside the LLC are not. The idea is to ‘segregate’ assets from each other which means you may want to hold assets in more than one LLC. For example, you may want one LLC to hold your ‘risky’ assets such as a rental property, boats, airplanes, recreational vehicles and another LLC to hold ‘safe’ assets such as your personal investment accounts, jewelry and antiques.
Beyond the LLC, the most popular choice of legal entity for asset protection is the Family Limited Partnership or FLP. FLPs are typically more complex and expensive to set up and manage than LLCs but also offer some additional advantages. There are also Domestic Asset Protection Trusts and Foreign Asset Protection Trusts that are sometimes used by wealthy families or those whose occupation places them at greater risks, such as physicians. While beyond the scope of this column, these topics are covered in my book, J.K. Lasser’s New Rules for Estate & Tax Planning.
To Do: Review a list of your assets and decide which should be held in an LLC for ‘risky’ assets and which should be held in an LLC for ‘safe’ assets.
Notice to Readers: In last week’s column, I discussed the liability risk of serving on for-profit and non-profit boards. A reader correctly pointed out that Alabama has statutes that significantly limit liability for non-profit board members.