The objective of asset protection is to prevent assets from becoming vulnerable to claims from potential creditors. Potential creditors can arise from innumerable circumstances, but a few common examples are legal actions that arise through divorce, malpractice, negligence, or other torts.
Without the benefit of a formal asset protection structure (an “APS,” as discussed below), individuals often protect their assets through uncoordinated measures such as through purchasing insurance, forming limited liability companies, or utilizing statutory protections (i.e., the homestead exemption). Once a claim is actually litigated, however, individuals might be disappointed in how little their assets are actually protected without a formal APS, especially since disjointed measures do not deter litigation itself.
Specialized Trusts Insulate Assets
The key to an effective APS is to restructure the ownership and control of assets. For example, consider Bob, a business owner who does not have an APS and therefore owns his assets personally, including a business (formed as a limited liability company), real estate, securities, and bank accounts. In the event of a legal action against Bob, all of Bob’s assets are vulnerable to a potential judgment from the legal action, as demonstrated by the diagram below, potentially including Bob’s interest in the business.
In order to maximize his protection, Bob can transfer his assets to a specialized trust (a “Trust”), which will assume ownership of the assets while allowing Bob to be the beneficiary of the Trust. Now, assuming the Trust is properly structured and administered, a judgment from the legal action is generally insulated from the assets because the legal action is against Bob individually, and Bob no longer owns the assets. Not only will the assets be insulated from attacks through Bob, but predatory plaintiffs/lawyers looking for deep pockets will likely lose their incentive to litigate or may be readily inclined to settle.
Specialized Holding Companies Can Make Trusts Even More Versatile
While Bob is surely grateful that his assets have the protection of a trust, he may find that a Trust alone is not ideal for particular assets, especially a business. The Trustee will likely have discretion over the Trust’s assets, including the business, and the Trustee is unlikely to completely align with Bob’s vision for the management of the business (setting aside whether the trustee is competent to manage the particular type of business).
However, by utilizing a holding company, the APS can become more flexible and robust. Instead of owning the business directly, the Trust can merely own a limited equity interest in the holding company, and in turn the holding company can own Bob’s assets, including the business. Bob, on the other hand, can serve as a manager of the holding company, which can allow Bob to retain an oversight role and continue to provide the needed expertise for the business.
Under this arrangement, as shown in green in the diagram, cash/property can flow from the business to the Holding Company. When the Holding Company makes cash/property distributions, they will pass through the trust. In most cases, the trust may distribute the cash/property immediately to its beneficiaries, such as Bob, but the Trustee can also have the discretion to prevent distributions from becoming subject to Bob’s creditors.
However, to properly balance a business owner’s aspirations in a legally compliant manner, the structure of both the Holding Company and the Trust is essential to a robust APS. While many Nevada firms promote trusts, Ideal Business Partners possesses the necessary sophistication in corporate law, finance, and taxation to tailor a unique structure that each business owner needs for both the Trust and the Holding Company.