Almost everyone engages in some form of asset protection. For example, a high-risk spouse may put assets in the name of a low-risk spouse or else in their joint name. Another example is that most people own businesses in a corporation or limited liability company to isolate the liabilities of the business from its owners and vice-versa. In this article, I am going to briefly explore a few of the less common, but still very important, asset protection techniques.
Domestic Asset Protection Trusts
Domestic Asset Protection Trusts (“DAPTs”) involve transferring assets into an irrevocable trust controlled by an independent trustee for the benefit of the transferor and perhaps of the transferor's family. So long as the transferor complies with state law regarding his or her liabilities and other assets, then after a certain waiting period the assets transferred into the DAPT receive significant asset protection, even though the transferor has the ability to get those assets back if needed. While not every state allows for DAPTs, some states provide asset protection for hundreds of years, so it is important to consider your situation and location as part of determining in which state the DAPT should be formed.
Personal Residence Trusts
Qualified Personal Residence Trusts and Non-Qualified Personal Residence Trusts both provide asset protection for your home. I have separately written about Qualified Personal Residence Trusts, but for purposes of this article, both have significant benefits and risks and are not to be used without careful attention to your situation. In particular, Non-Qualified Personal Residence Trusts permit someone to transfer their house into the trust in exchange for a promissory note back to the transferor, so the home is actually sold to the trust. The transferor pays rent for their use of the house and the rent is then used to pay the promissory note. Because there is an actual sale of the home for valid consideration, the Non-Qualified Personal Residence Trust generally provides better asset protection than a Qualified Personal Residence Trust.
Family Limited Partnerships and LLCs
Although we typically think of LLCs and corporations as owning and operating active businesses, those types of entities can also be used to operate passive investments and provide asset protection. The key is that the entity must be respected as separate from its owner and have a valid business purpose. Frequently, family limited partnerships and family limited LLCs are used to hold rental properties or securities and then pass ownership of the entity, over time, to children in a tax-efficient manner.
In addition to these three strategies, there are many other methods to protect your assets, including the use of certain investment accounts, gifting to children, and properly controlling the liabilities on your assets. Please do not hesitate to contact Richard G. Pearce, Jr., Esq. if you would like to discuss protecting your assets or estate planning in general.