Even when your days are filled with nonstop work and family activities, looking to the future is a must. Here, tax and estate planning attorneys John Peace and T.J. Lawhon share straightforward ways to plan ahead for asset protection that may help the process feel less daunting.
Protecting Your Assets: How LLCs, LPs and Trusts Can Help
When people think of asset protection, they often picture offshore trusts or schemes to hide wealth from creditors. But in reality, asset protection simply means using legal tools like limited liability companies (LLCs) and limited partnerships (LPs) that are recognized by state law. In Arkansas, these tools can provide solid protection when set up correctly.
LLCs and LPs: Key Tools for Asset Protection
Both LLCs and LPs work in similar ways. A couple or individual can transfer assets such as property, business interests or investments into an LLC or LP in exchange for ownership interests in the entity. The original owners (called general partners or managers) still maintain full control over how the business is run.
Here’s how it works:
- Asset transfer: You place your assets into the entity, but you still control them. Over time, you can pass ownership to your children, grandchildren or other heirs as part of your estate planning.
- Protection from creditors: If creditors come after you, they can’t take ownership of your interest in the LLC or LP. Instead, they can get a “charging order,” which allows them to claim any distributions (like income or profits) that are made to you, but they can’t force the business to make those payments. Importantly, even if no distributions are made, you’re still responsible for the taxes on the income.
Trusts: Another Layer of Protection
Another powerful option is setting up a trust. In a trust, you transfer assets to a trustee, who manages them for the benefit of beneficiaries like your children or grandchildren.
However, not all trusts protect assets from creditors. For a trust to provide solid protection, it should generally include these conditions:
- Irrevocable: Once you set it up, you can’t change it.
- Spendthrift provision: This limits a beneficiary’s ability to transfer their interest in the trust, shielding it from creditors.
Some trusts, like domestic asset protection trusts, are specifically designed to protect assets not only from creditors, but also from divorce or other legal claims. These trusts are increasingly popular for families who want to protect assets long term.
Timing is Everything
One important thing to remember: Asset protection planning needs to start before creditors are knocking at your door. If you transfer assets to avoid an existing debt, it could be considered fraud. So, it’s best to start planning as soon as possible to ensure you and your family are protected down the line.
Remember, LLCs and LPs can help protect assets by separating them from your personal liability, and the charging order limits creditors’ ability to collect, while trusts with the right features (like a spendthrift provision) can safeguard your assets from creditors and other claims.
Always plan ahead. Waiting until creditors are already involved could hurt your protection strategy.
John Peace and T.J. Lawhon practice tax and estate planning law with the Little Rock-based law firm Wright Lindsey Jennings and are included in The Best Lawyers in America. This article is for information use only and is not intended to offer specific legal or tax advice.