Asset Protection – Common Misconceptions and the Bucket Theory

  • July 11, 2018

It is quite common for clients to tell me that they thought their standard family revocable grantor trust would serve to protect assets from creditors.  This is a very common misconception.  Your standard revocable family trust does not in fact provide any asset protection.  There are certain types of trusts that can provide assert protection, such as Nevada irrevocable asset protection trusts.  However, it is not always necessary to utilize these very advanced estate planning techniques for the average person to protect assets from creditors.

When seeking to protect assets we seek to achieve two goals:

  • separate your business assets from your personal assets.
  • separate your business assets from other business assets.

For example, if you own a primary residence and two office buildings, your first consideration might be putting the office buildings into an entity (LLC, Series LLC, Corporation or the like) and removing them from being titled under your individual name.  The second consideration would be to separate the assets from each other by putting each office building into separate entities.

Why is this type of structure recommended?  Because if everything is in your individual name and one of the tenants sues for a slip and fall, and obtains a judgment against you, it will be a personal judgment and your personal assets may be subject to that judgment, including your home.  If all of your assets are in your name, you have created one big bucket of aggregated value for a judgment creditor to dip into.

However, if the business assets are held in an entity structure, you are starting to create multiple buckets which hold fewer assets and less value.  The tenant, in this case will be limited to seeking a judgment against the business at which s/he fell and recover only against its assets, which will no longer include your personal home. Further, if we have taken the extra step of separating the business assets from each other, then we are again creating more buckets and minimizing the value that is available for satisfaction of the judgment in each bucket.

Every client’s needs, level of risk and level of risk tolerance are different.  Additionally there may be tax and other considerations when looking at entity structures.  Corporate formalities and relevant laws must be adhered to in any entity structure to maintain the protections they can afford.  It is important to discuss all of these issues with your legal counsel and CPA before forming new entities and transferring assets.

You spent a great deal of time and effort to earn and grow your assets.  A well thought out asset protection plan is important to safekeeping them.

SaveSave

Nevada Has No Corporate Taxes, Right?

  • July 11, 2018

It is true that Nevada does not impose corporate income taxes. This and the fact that Nevada also does not impose personal income tax makes it a very business-friendly state. However, this does not mean that you can escape taxation simply by forming a corporation or limited liability company in Nevada. First, regardless of where you incorporate, the Fed’s are always entitled to a piece of the action, whether that is recovered through corporate taxes or personal taxes. Second, if you are doing business in another state, you may be required to register to do business in that state, which may mean paying annual registration fees as well as state corporate income taxes or other taxes imposed by that state. Third, if you are not a resident of Nevada, you may be obligated to pay state personal income tax in whichever state you do reside.

So what constitutes “doing business” in another state? Here is a lawyer answer for you – it depends. Every state has a different statutory definition of what constitutes doing business in that state. It is fairly safe to say that if you repeatedly conduct activities in a state, like shipping goods from a warehouse or having salespeople visiting customers on a regular basis, that is likely to be considered “doing business” in that state. This may mean that you need to register your business to do business in that state.

While Nevada is one of the most business-friendly states around, which is one of the many reasons we love our beautiful Silver State, forming an LLC or corporation here, if you are not actually conducting business in our fair state, is not necessarily going to help you avoid taxes in another state. The solution, of course, is for you to bring your business to Nevada. We would welcome you with open arms. But short of that, you should consult with an attorney and/or CPA before electing the state in which you incorporate your business