Fraudulent Transfers and Fraudulent Conveyances
Under the Federal Bankruptcy Code and state laws such as the Uniform Fraudulent Transfer Act (UFTA) and the older Uniform Fraudulent Conveyance Act (UFCA), a court may void a transfer of assets that is intended to hinder, delay or defraud creditors. If a transfer is voided, the court may allow a creditor to attempt to seize the assets or may award the creditor damages equal to the value of the assets transferred. You must consider this issue in connection with selecting an asset protection planning strategy.
TRUSTS
Revocable, irrevocable trust, what's that mean? Revocable is when the original person with the assets transfers (repositions) the assets to a trust with strings attached. The Grantor, the Trustee, and the beneficiary are the same person. Effectively you have kissed yourself on the hand and blessed yourself as the Pope.
"Revocable Trusts" are the most typical types of Trusts. They are often called "Family" trusts or "Living Trusts." The most useful purpose of a Revocable Trust is to avoid Probate proceedings upon your death. Essentially, you are telling the Probate Court that you do not wish that its procedures be utilized to pass your assets upon your death.
A revocable trust does absolutely nothing for asset protection. Many lawyers recommend revocable trusts for avoiding probate, recognizing that the trust is not worth the paper it's written on for protecting assets against frivolous lawsuits and the avoidance of estate taxes.
An Irrevocable Trust is where the Grantor (the person with the assets) gives-up complete control to an independent Trustee who in turn will use his judgment as Trustee to manage the assets for the beneficiaries of the trust. The fiduciary relationship of the Trustee is to the protection of the assets at any cost. The Trustee must protect and must diligently invest under the prudent man rules, he cannot ever deal for himself.
Irrevocable Trusts DO provide asset protection. Keep in mind, however, that you really cease to own the property. Instead, it is being held for your beneficiaries (for example, your children).
An irrevocable trust is the only significant asset protection device for avoiding frivolous lawsuits, avoiding the probate process, avoiding estate taxes, and is the only device for avoiding the mandatory spend-down provisions for qualifying into a nursing home.
CORPORATIONS AND LLC'S
Corporations and LLC's do provide asset protection - in a way. That is, a judgment against a Corporation or an LLC may only be attached to the assets owned by the Corporation or LLC.
For example, if you own rental property in a Corporation or a LLC, and a judgement is rendered against the LLC, the judgment only "attaches" to the rental property owned by the Corporation or LLC. The judgment does not attach to the personal asset of the owner(s) of the Corporation or LLC. There are, however, exceptions to this concept:
A. Failure To Honor The Integrity Of The Corporation Or LLC
You must treat the Corporation or LLC as an entity totally separate from yourself. You must maintain separate books and records. You must not co-mingle personal assets and liabilities - for example, you must not pay "personal" bills from the assets of the Corporation or LLC.
B. You Cannot Use A Corporation Or A LLC To Hold Non-Business Assets
A Corporation or a LLC is ONLY useful for "business assets" (such as rental property). While you "physically" could transfer your home to a Corporation or a LLC, since your home is not a business asset, the Corporation or LLC will not protect your home from your creditors.
C. A Corporation Or A LLC Does Not Relieve You From Liability For A Mortgage Loan For Which You Signed Personally
Obvious as it may sound, if you signed personally for a mortgage loan to buy real estate, the transfer of the property into a Corporation or a LLC does not relieve you from personal liability for the mortgage debt.
"How Many Corporations or LLC's Should I have?"
Many lawyers will recommend that you put each property you own into a separate Corporation or LLC.