Asset Protection

The major difference between an LLC and a corporation [either an S or a C corporation] is the Charging Order.

A charging order is the only remedy a court can award a creditor who is trying to collect on the assets of the debtor when the assets are in an LLC or limited partnership.

A charging order does not allow creditors to sell assets of the LLC or to force distributions of income. Neither does the charging order transfer any interest in the LLC to the creditor or force the debtor to sell his interest or in any way to turn over the sale proceeds to the creditor.

Revenue ruling 77-173 provides that a creditor receiving a charging order is treated as a partner for federal income tax purposes.

Investment assets, i.e. stocks, bonds, mutual funds, certificates of deposit, into an LLC that does nothing but hold those assets. This can be used as a holding company in the future by gifting ownership to family members.

The answer to the question is: it depends. To take an extreme example, in the event that you are in a bank while it’s being robbed and you slip your wallet into your sock, it is a form of asset protection and it certainly is legal. Likewise, if you’re in the midst of being robbed and you hide your belongings, it is legal.

What is not always legal is engaging in asset protection or hiding your assets from legitimate creditors that have been adjudicated to be a judgment creditor by a court of competent jurisdiction. In other words, in the event that a court has made a determination that you legitimately owe an obligation, transfers made thereafter could be a violation of the Uniform Fraudulent Transfer Act. The remedy for most infractions under the Uniform Fraudulent Transfer Act is an avoidance of the transfer and potential culpability for the transferee.

However, just because you have judgment, a potential judgment, the threat of a lawsuit or a claim against you, does not mean that you are prohibited from engaging in any transfer. For example, it is not illegal to plan and pay for a trip to Europe while you have a judgment pending against you. Can you transfer assets to your family members, friends or favorite creditors? Potentially. If the transfer is primarily to avoid a legitimate creditors attempts to collect money that you owe, then the transfer will probably be avoided. However, there are many legitimate, non-asset protection planning reasons for transferring assets to family members, i.e. you committed to paying your kids college education, you owe wages to a sibling, retirement planning, estate planning, financial efficiency.

If your primary purpose for transfers to related parties or exempt assets is for asset protection reasons and you have likely judgment creditors, your transfers are in jeopardy. The best asset protection planning are transfers that are made for reasons other than asset protection.