If LLCs are so safe, why do I need more than one to protect my assets?
If LLCs are so safe, why do I need more than one to protect my assets?
LLCs and Family Limited Partnerships (FLPs) can be wonderful legal tools for protecting assets from outside creditors. If you do something wrong (or are accused of doing something wrong) and a judgment or lien is placed against you, LLCs and FLPs can provide an effective legal barrier between you and your assets. Yet asset protection advisors sometimes recommend more than one limited liability entity— even for relatively small estates. If these structures are so great at protecting assets, why would a person (or a family) need more than one such entity?
First consider that you have properly formed and maintained a multi-member LLC which owns valuable investments or business assets. Later, you are sued personally for something that happened as you were driving your car on personal errands. The injured party has medical bills that exceed your insurance limits so the plaintiff is coming after you – personally. The LLC did nothing wrong and the assets of the LLC are generally not attachable because the lawsuit arose from outside the LLC— that’s called outside liability. In essence, you effectively created a separate legal bubble for your assets, separating the assets from your personal actions. Congratulations, you’ve effectively protected your assets.
Now, consider that you have four rental properties, all held within one LLC. One of your tenants files a lawsuit claiming injury from black mold growing inside their apartment. Your insurance company claims that black mold is excluded in your policy so you’re forced to hire an attorney and defend yourself. Because one of the assets inside the LLC (a rental property) created the lawsuit, everything else inside that legal bubble (all your other properties) is subject to the lawsuit— that’s called inside liability. In this case your LLC may very well shield you personally from the lawsuit, but it does not protect the assets from each other inside the bubble and all are potentially attachable to satisfy the judgment.
So why would asset protection specialists recommend LLCs and FLPs that don’t protect your assets from inside liability?
Because such entities do not exist; all business entities are subject to inside liability. Hence, whether it is a LLC, FLP, Off-shore Trust, Land Trust, Revocable Trust, Irrevocable Trust, or Corporation, the rule is the same nationwide: if any of the assets inside the entity create a problem, all the assets within the entity may now be attachable to satisfy the judgment and restore the injured party. There are certainly things you can do to reduce the risk inside a business entity such as carrying adequate liability insurance, leveraging the assets with debt, controlling inventory, leasing equipment, managing accounts receivable, etc., but you can’t eliminate it entirely. Often the simplest and most effective solution is to create separate legal entities.
So how many LLC and FLPs do you need to protect your assets?
That depends on the dollar amounts involved, the percentage to your overall net worth, and nature of the assets. Obviously, some assets bring more risk to your estate than others. Safe assets, such as bank accounts, brokerage accounts, cash, collectibles, paintings, jewelry, etc. do not have inherent risk of causing harm and inviting costly lawsuits. Alternatively, dangerous assets are defined as assets that may cause injury and attract lawsuits; therefore, they should sometimes be separated from each other. Examples of dangerous assets include investment real estate, automobiles, recreational vehicles, construction equipment, machinery, etc.
Because of the potential threat that dangerous assets bring to other assets within an entity, it is generally considered unwise to combine safe and dangerous assets in the same legal protection entity. For example, it would be inadvisable to transfer a large brokerage into a FLP and then introduce risk into the entity by conveying a boat or RV into the same legal entity.
If all of your assets are safe by definition, one well-structured legal entity is probably sufficient. If, however, your assets include multiple rental properties you should consider multiple entities to protect the properties from each other. The number of LLCs you’d use would be determined by a number of factors including: the amount you are willing to risk in each LLC, how much equity you have in each property, state filing fees, cash flow, your insurance coverage, and where the properties are located.
With proper legal structuring you can often:
Protect business assets from personal lawsuits;
Protect personal assets from business lawsuits;
Convey attractive business assets out of the operating business;
Provide effective exit strategies for when you sell your business;
Reduce your taxable income, capital gains and self-employment taxes;
Reduce or completely eliminate estate taxes and probate fees;
Completely isolate assets from each other.
Please contact the Asset Foundation office at 800-276-1430 for any questions related to this article. We look forward to helping you.
“If LLCs are so safe, why do I need more than one to protect my assets?.” Asset Protection, Asset Foundation. 04 August 2014. Web. 07 October 2015.”