Asset Protection
By: Beth
Cohn
In a volatile economic climate, such as the current economic
downturn, there is a significant increase in litigation cases and
bankruptcy filings. When economic times flourish, people
focus on acquiring assets and doing "deals". During slower
times, people may look for an opportunity to protect their assets
from potential creditors' claims. There are planning tools -
entity selection, separation of personal and business assets,
homestead exemption, adequate insurance, retirement account funding
and gifting - that may protect your assets.
Entity Selection
Choice of entity is vital for asset protection. Under a
limited liability company or partnership, a judgment creditor can
obtain a court order to attach just the membership interest of that
member or that partner as the exclusive remedy to pay an
outstanding judgment. The judgment creditor only has the
rights of an assignee. The other member's interests are
protected. Single member LLC may not have this
protection. Under either a partnership agreement or limited
liability partnership, attaching the partner's transferable
interest is the exclusive remedy.
A court may appoint a receiver for the partner's share of the
distribution or order foreclosure of a transferable interest.
The creditor will have no vote or participation in the management
and they will not receive information regarding the business or the
right to review books and records. The manager of a LLC or
the general partner of a limited partnership continues to determine
when distributions are made or the general partner or manager's
salary. This applies to general partners of a limited
partnership, but not to a manager of a LLC.
Generally, always separate business and investment activities as
well as personal assets from business assets. Avoid having
multiple properties or businesses in the same entity as this may
allow a creditor access to assets. Make sure to follow formalities
so that your entity or entities are in good standing so creditor
cannot "pierce" the "veil" of protection of the entity.
Homestead
Exemption
There is a $150,000 homestead exemption for a personal
residence. Married couples can only claim one homestead
exemption. Judgments will become a lien on real property for
five years except for the homestead property, of which up to
$150,000 will be unencumbered. A consensual lien such as a
mortgage or deed of trust, a mechanics lien, or a lien for spousal
maintenance/child support will still attach to the property.
The homestead exemption continues after a sale for eighteen
months or until the proceeds are reinvested in a new homestead
property. It also continues if the property is transferred to a
revocable trust. No recording of the homestead is
required.
It is preferred to limit equity in homestead property to less
than $150,000. One option is a "Qualified Personal Residence
Trust". The party has the rent free use of the property for a
period of time and the remaining interest is gifted. The
split interest should have diminished value to creditors.
Another option is to borrow against the property with a home
equity credit line and contribute proceeds to family limited
liability company or family limited partnership for investment
purposes and start a gifting program.
Other Asset Protection
Tools
Because Arizona is a community property state, review how title
to property is held as the community is responsible for community
debts. If both spouses sign a personal guaranty, the spouses'
community property will be collectible by the judgment creditor in
whose favor the guaranty was executed.
A gifting program may protect your assets. Always consider
fraudulent transfer laws so that property is not inadvertently
available to creditors. Gifts in irrevocable trusts may
protect property from creditors while gifts or transfers in trust
for spouse can't protect spouse from community debt.
Maximize contributions to qualified retirement plans such as
IRAs and 401(k) plans and consider funding Section 529 education
savings plan accounts. Maintain adequate levels of liability
insurance to further protect your assets.
It is important to start planning before problems occur to
maximize the benefits of asset protection.
3200 North Central Avenue
. Phoenix . Arizona