How to Protect Assets With a Trust, Corporation or Partnership
Individuals can preserve their assets for their heirs and protect their hard-earned estates from the claims of creditors. Trusts, limited liability partnerships, limited liability companies and corporations are all different but useful asset protection strategies for individuals concerned about taxes and personal liability. Each entity changes the way assets are held or creates a shield between assets and potential creditors.
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Choose a trust if you're looking for estate planning advantages as well as asset protection. In a trust, one person or entity --- called the trustee --- holds property for the benefit of another --- the beneficiary. Since you no longer hold legal title to the property you put in a trust, your creditors usually can't get it even if you're the beneficiary, (Revocable trusts, where you retain the right to take the property back, often don't provide these asset protection benefits.) Additionally, when you die, trust assets pass outside your estate directly to your designated beneficiaries. This means assets in a trust --- even a revocable trust --- won't be available to satisfy claims against your estate.
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Protect your personal assets from the claims of creditors by incorporating your business. A corporation works by existing as a separate legal entity. Although you may own all of the shares in the company, the corporation is its own legal person. Your employees are actually agents of the corporation, so when they cause injuries or damage to third parties, the corporation is liable. Provided you have consistently followed your state's corporation laws in the startup and operation of your business, only corporate assets will be available to satisfy creditors' claims. Shares in corporations can be inherited and are also more easily transferred than interests in other types of entities.
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Form a limited liability company (LLC) to gain the asset protection benefits of a corporation without the extensive paperwork and reporting requirements built into most states' corporation laws. An LLC can usually engage in almost any activity that corporation can, although the ability for an LLC to operate in different states may be restricted. In addition to their ease of documentation when compared with corporations, LLCs often offer further asset defense in the form of charging order protection. While your personal creditors can seize your shares in a corporation (including voting rights), many states limit their recourse against your LLC interest to an assignment of earnings distributions. So while creditors can seize control of a corporations, in many cases they can't seize control of an LLC. Interests in LLCs, however, aren't as easy to transfer as shares in a corporation.
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Tips & Warnings
Avoid partnerships if you're looking for asset protection. Common-law general partnerships leave you with unlimited liability for business debts and the torts of your partners. Limited partnerships (LPs) only limit your liability if you don't participate in business operations, and limited liability partnerships (LLPs) are generally only available to certain professions.
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