LLC Asset Protection Strategies: Everything You Need To Know

LLC asset protection strategies are designed to shield the assets of your LLC from judgments and lawsuits as well as unforeseen accidents and circumstances.3 min read

LLC asset protection strategies are designed to shield the assets of your limited liability company from judgments and lawsuits as well as unforeseen accidents and circumstances. These can include financial plans and legal tools, such as certain business entities and trusts. Protecting your assets assists with estate planning, achieving financial goals, and preserving the viability of your business.

Limited Liability Companies

LLCs are often established as a vehicle to protect assets. The statutes that govern this business entity prevent creditors for seizing the business or its assets. Instead, the creditor will receive a charging order, which entitles them to LLC distributions. However, these are not enforceable and are subject to income tax when they are received. The states that offer the highest level of asset protection for LLCs include Delaware, Nevada, and Wyoming.

A charging order will also not give your creditor voting rights. It simply requires distributions to be paid to the creditor before they are paid to you as the owner.

Many individuals who own real estate establish a separate LLC for each property. This means that a lawsuit impacting one of your rental properties will not affect the others as they are each held in a separate company.

Asset Protection Trusts

This is widely considered the best method of protecting company money from lawsuits and is one of the only asset protection strategies to reliably do so. Typically, an asset protection trust is formed overseas out of local jurisdictions. This prevents the courts from accessing the funds. Liquid assets are best protected by this method. The strongest locations for asset protection are in Nevis and the Cook Islands.

The use of asset protection trusts is legal in 16 states as of September 2016, including Wyoming, Virginia, Utah, Tennessee, South Dakota, Rhode Island, Oklahoma, Ohio, New Hampshire, Nevada, Missouri, Mississippi, Hawaii, Delaware, Colorado, and Alaska. Most states have laws that cover:

  • Whether the asset protection trust is irrevocable
  • Whether the grantor can be a principal beneficiary of the income and principle, discretionary, or income
  • Whether the trustee must live in the domestic asset protection trust (DAPT) state
  • Whether any level of trust administration must take place in that state

The trustee is responsible for distributing assets and otherwise administering the trust based on the established provisions. These may include protective strategies such as the decanting of trust assets or the designation of a trust protector or independent trustee.

Certain creditors can seize assets from a DAPT, including children to whom you owe child support, a spouse during divorce proceedings, a creditor who files suit within the statute of limitations, and those with claims associated with property damage, personal injury, or death dating to before the trust was formed.