Legal Structures For Asset Protection: Trusts, LLCs, And Corporations

Choosing the right asset protection strategy can be a complex process, made more intimidating by the many overlapping and intersecting advantages and disadvantages of the various options. In the end, the most appropriate asset protection tools for your estate plan will depend on your personal circumstances, the assets you wish to preserve, and your overall estate planning goals. Working through the options with an experienced attorney can often help individuals to arrive at asset protection strategies that grant them peace of mind. Call (949) 274-9975 to schedule a consultation with Wakefield Law Firm today.

Trusts

A trust is a distinct legal entity set up to contain assets – to hold them “in trust” for the benefit of the trust’s beneficiaries. While a trust may be legally its own entity, a trust is of course not “animate” and cannot make decisions, nor act on them, itself. This reality is the reason why every trust must have at least one trustee, who is appointed in the trust instrument (the legal document that establishes a trust) and carries out its terms.

One of the more interesting aspects of trust formation is that, while trustee, beneficiary, and grantor (the party responsible for forming and funding the trust) are all separate legal roles, the same individual (a “natural person,” as distinct from a “legal entity”) may inhabit each of them, depending on the type of trust created. The choices made in this regard can have a significant impact on the degree of asset protection a particular trust structure provides, and when. The revocable vs. irrevocable nature of the trust will also typically be a factor in the degree of asset protection the trust affords.

Revocable vs. Irrevocable Trusts

The key difference between revocable vs. irrevocable trusts is in one sense self-explanatory: A revocable trust can be revoked, or dissolved, by the grantor, while an irrevocable trust usually cannot. The implications of this seemingly simple distinction, however, can sometimes be surprisingly complex.

Generally speaking, an irrevocable trust offers more substantial asset protection than a revocable trust. A revocable trust, on the other hand, offers significantly greater flexibility. Revocable trusts are often used to ensure control over not just the immediate distribution of property from a deceased person’s estate, but the long-term management of those assets. Irrevocable trusts are commonly structured as part of an individual’s long-term care planning, or in order to protect assets from creditors or against possible estate taxes during probate.

Long-Term Care Planning

Medicaid trusts, also sometimes known as Medicaid Asset Protection Trusts (MAPTs) are among the most common types of trusts used in long-term care planning. According to the American Council on Aging, these trusts are used to preserve an individual’s eligibility for Medicaid coverage for long-term care scenarios, should the individual need such care in their later years. The downside of these trusts is that, while they may protect assets from being exhausted to pay for long-term care during the grantor’s lifetime, in order to serve its function a MAPT will generally need to be established as an irrevocable trust – meaning that the grantor also no longer has direct access to the assets placed in the trust.

The potential benefits of a MAPT are twofold. Firstly, by placing the assets in an irrevocable trust and carefully constructing beneficiary designations, the grantor can ensure regular distributions from the trust throughout their own lifetime, while also protecting the assets contained in the MAPT for the future. Secondly, after the individual’s death, assets contained in a MAPT are generally protected from Medicaid recovery by the state, as well as being secured against other potential creditors of the individual’s estate.

Protection Against Creditors and Taxes

Another common use of trusts is to protect assets from creditors and potentially estate taxes, depending on the value of the estate. Although the California State Controller’s Office phased out the California estate tax in the early 2000s, a MAPT as well as certain other types of trusts can also provide asset protection for large estates that might otherwise exceed the federal estate tax threshold.  Generally speaking, an irrevocable trust will provide the strongest asset protection, securing the assets contained in the trust against the claims of a grantor’s creditors in most cases and usually against computations for federal estate tax when it comes time to probate the individual’s estate. Keep in mind, however, that the logic behind this asset protection strategy is that the grantor cannot regain access to the assets except as directed in the terms of the trust. If the grantor is also a beneficiary of the trust, then he or she may be able to receive distributions from the trust, through the trustee – but any distributions received may be subject to lien for debts during the grantor’s lifetime.

Cumulatively, these considerations tend to mean that while irrevocable trusts can be powerful tools for asset protection, choosing which assets to place in them, and what terms to set, can be a detailed and multi-layered process. An estate planning attorney with Wakefield Law Firm may be able to help you weigh your options.

Limited Liability Companies (LLCs)

Limited Liability Companies, or LLCs, are used primarily to protect business owners’ personal assets in the event of a major financial challenge for the business. Note that for tax purposes, a single-member LLC is disregarded as a separate entity, much like a sole proprietorship. In other scenarios, an LLC can often provide significant protection for assets such as a major liability judgment against the business. A multi-member LLC may also provide protection for the assets of individual members, and of the company itself, against financial missteps by any other member; however, in those multi-member scenarios, there may be times when a partnership business structure is more appropriate to the firm’s needs. If your primary reason for considering an LLC is to protect your personal assets from the vicissitudes of the business world, then you may also want to discuss with an estate planning attorney some strategies for incorporating business succession planning into your personal estate plan.

Corporations

Similar to LLCs, corporations can protect personal assets from the debts of a business. Because a corporation as a legal structure is completely distinct from its founders, leaders, and shareholders, a corporation will also typically be protected from any personal financial liabilities of its owners or officers – potentially to a greater extent even than in an LLC structure. Both the tax obligations and the procedures for forming the business are different from those involved in forming an LLC, however, and in some respects they can be more complex.

Corporation Organizational Structure

A corporation may be “closely held,” in which case there are usually very few shareholders; it may also be “publicly traded” (this is often the case with very large businesses). Corporations have the ability to sell shares in order to increase their supply of capital, for instance as they prepare for an expansion.

The specifics will differ depending on the scale of the organization and the type of corporation selected, but any business seeking to incorporate in California will need to file Articles of Incorporation with the California Secretary of State’s office. Generally speaking, a corporation will be overseen by a Board of Directors, with a roster of officers including the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and in many instances a Chief Operations Officer (COO) and Chief Communications Officer (CCO), as well. In some smaller organizations, a single individual might sometimes inhabit more than one officer position.

Corporation Tax Rules and Filing Requirements

Regardless of the number of officers or the complexity of internal organization, a corporation structure will not allow for “pass-through” taxation in the same way as a single-member LLC or indeed many types of revocable trusts. Corporation tax structure can be important to consider in part because it usually means that the corporation’s income will be taxed separately from that of the individual officers, directors, shareholders, and employees – however many or few these may be. Essentially, a corporation’s income is taxed when it is income for the company, and then portions of that same revenue are taxed again as they are distributed to individual employees (from the CEO on down) as wages. Although the corporation pays the first income tax and individuals pay the latter, for individuals who hold a majority stake – or even a large minority stake – in the business, this system can sometimes feel like a form of double jeopardy.

Experienced Estate Planning Counsel

If you are developing an asset protection strategy for your California estate plan, the good news is that you have a variety of options from which to choose. However, this very advantage can make the process of selecting the estate planning tools most appropriate for protecting the assets you most wish to safeguard more difficult. Consider scheduling a consultation with an estate planning attorney to discuss your priorities and prepare an asset protection strategy that meets your unique needs. Call Wakefield Law Firm today at (949) 274-9975 to set a time with our team.