Funding Asset Protection Plans The Right Way

Lately, I’ve been fielding a lot of interesting calls  regarding “unfunded” asset protection plans.  An asset protection plan–a domestic entity like a limited liability company combined with an offshore asset protection trust–is only useful to protect assets against lawsuits and other creditors if there are actually assets titled in the name of the plan.  In other words, an asset protection plan is pretty much useless if it doesn’t actually have assets in it. Funding asset protection plans isn’t difficult work, but it’s extremely important and will take some effort on your part. It’s worth taking the time to get it right, and you should get started immediately.

Basics of Funding Asset Protection Plans

  • Primary and Second Residential Homes (i.e. homes that you actually use and don’t rent)

When funding asset protection plans, the first asset you should think about is your home. If you live in a state with strong homestead protection like Florida or Texas, then you don’t need to do anything.  Your home is exempt from creditor claims and completely protected. If, on the other hand, you live in a state like California and have a house that exceeds the limited homestead protection, then you need to take action to protect your home. The typical way to do that is to “deed” your home into your asset protection trust. The same rule applies for any second homes that you own but don’t rent (e.g. family vacation home in the mountains). By the way, this will work even if you don’t fully own the second home. For example, if you are partners with other family members, you can still deed your share of the residence into your asset protection plan.

  • Rental Properties

Rental properties carry more risk for their owners than non-rental properties.  As a result, you need to insulate them or compartmentalize that risk so that it doesn’t place an unnecessary risk on your other assets (e.g. cash, stocks, bonds).  That compartmentalization and risk insulation is achieved through the use of a limited liability company (an “LLC”) that is a subsidiary of you master limited liability company.  It works like this:

  1. The subsidiary LLC is created, and it is owned in the exact same proportions as the rental property (e.g. if you own the rental property yourself, you will need to own 100% of the LLC).
  2. Deed the rental property into the subsidiary LLC.
  3. Transfer the subsidiary LLC into your asset protection plan (i.e. the Master LLC or directly into the asset protection trust).

By following those steps precisely when funding asset protection plans, you can in some instances avoid transfer taxes and/or a reassessment for local tax purposes (always check with your local taxing authority and clerk of court to get the specific details regarding your state and county). Click here to download a guide for Florida or click here to read the Florida Funding Guide online.

  • Safe Assets a.k.a Assets That Can’t Cause Liabilities

Cash, stocks, bonds, precious metals, jewelry, valuable coins, antiques, art, and other collectibles like very expensive wine are all considered “safe assets.”  They are considered safe, because they can’t independently generate liabilities for you. People can get hurt in your houses, on your boat, in your car, and on airplanes. That’s just not true of safe assets. Because safe assets can’t harm others or cause independent liabilities, your master limited liability company can directly own safe assets, without the need to first place those assets into a subsidiary LLC.

  • Vehicles

Vehicles are risky assets. They have the potential to generat lots of liabilities. As a result, personal vehicles should be left outside your plan completely, and business vehicles should be owned either by their respective businesses or, even better, by a separate vehicle leasing LLC.  Own vehicles in your personal name, carry appropriate insurance to cover the cost of a legal defense if you’re involved in an accident, and trust that your other assets are safely protected in your asset protection plan

If you have questions on funding asset protection plans . . . .

If you have questions about funding asset protection plans, or if you’re interested to develop an asset protection strategy, call MWPatton Asset Protection Attorney today. We’ll be happy to answer your questions and provide you with a full asset protection analysis. Also, take the time to read this very good article on the adverse effects of an unfunded or improperly funded asset protection plans: Funding The Foreign Asset Protection Trust or click here to read it online.