The Importance of Estate Planning
Estate planning is important in planning for the reality of death. Without an estate plan, an attorney will receive 6-7% of your estate for handling the affairs. To provide the most money to your children or heirs, you need to plan beforehand. If you have children, you don’t want the court deciding who will care for the children and how.
Revocable Living Trusts
A revocable living trust is a trust where you are named as the first trustee and first beneficiary. Upon incapacitation or death, other listed people have power or rights to your assets. It is dormant (revocable) until you die, at which point it becomes irrevocable. There is a myriad of provisions you can change while you’re alive, such as who has rights to your assets and how much control each person has. Revocable Living Trusts act as a disregarded while you’re alive and are only included on a form 1040.
There is no asset protection with a revocable living trust. They are not lawsuit protected due to their ability to be changed but are very useful to avoid probate. Anonymity is usually not included with a revocable trust. Upon death, the revocable trust becomes irrevocable. Irrevocable trusts are lawsuit-proof because they aren’t owned by anyone.
Dual Estate Plan or Shadow Estate Plan
These strategies allow you to keep your personal investments public, such as your home and car. Other investments you may have can be hidden from potential lawsuits in these plans.
LLCs Used in Combination with Trusts
LLCs can be categorized as high-liability, zero liability (cash and portfolio), and middle ground (high value and high liability, such as real estate).
LLCs can be owned by a lawsuit-proof trust, but the client is the manager. They have control, but they are not considered the owner. Lawsuit protection comes down to ownership. If you aren’t the owner, even if you control/manage it, you are legally separated from lawsuits. Using LLCs and Family Limited Partnerships allows the trust to be protected while the client maintains control.
Family Limited Partnership
FLPs are limited partnerships under the law. The family designation means that the general partner has dictatorial control, more absolute control than other partnerships. Usually, the GP takes all liability and an investor contributes with limited liability proportionate to their investment. Opposed to a typical business partnership, in Family Limited Partnerships, LPs or investors (children, heirs), cannot fire the GP (parents). This makes FLPs a great way for families to plan and transfer wealth while still maintaining control.
FLPs also give you a gift tax exemption. This removes the asset from your estate, omitting the estate tax, allowing you gift tax exemption.
Take the assets that have the most potential appreciation, have them appraised when they are at a lower value, and place them in an FLP.
Typically assets are valued by the clients’ CPAs. Should always err on the side of responsibility and reason to avoid being audited.
Laws around single member LLCs differ state by state, and they relate to the state where the LLC and properties are. Generally, due to fair faith and credit between states, LLC law and trust law can usually be applied to other states. There are exceptions, such as California. In these situations, the location of the owner, LLC, and properties matters.
If you are being sued, the lawsuit must take place in the state where the LLC is registered. If someone sues you from California, but your LLC is licensed in a state that protects single-member LLCs, you will be protected.
Generally, you need to have an LLC in the state where you conduct the majority of your business. For example, if you don’t do this in California, your LLC will be registered as a foreign LLC and treated as a California LLC.
How to Avoid the $800 Franchise Tax?
Establish an irrevocable trust with a different person as the trustee. To make it lawsuit-proof, you can be the beneficiary, but not a trustee. Spouses generally do not count as this other party. Provisions are made that allow the settlor (you) to fire and hire the trustee without cause.
Differences Between LLCs and LLPs
LPs are much older, they were originally a business tool where the GP has business skills and less to lose. Investors would contribute with 0 liability outside of their investment and no right to management or control.
LLCs were invented later. They are partnerships which allow you to reallocate the tax burden vs write-offs at a custom level, not exactly equal to percent ownership. They are powerful in a lucrative and complex economy.
Gifting to heirs through an LLC, though they aren’t technically a managing member, do allow heirs a right to management control. They can go to court and ask for an increased role, depending on the circumstances. LLPs are much stronger for control because the limited partners have zero right to management control.
A similar structure for purpose, LLPs are stronger for control and LLCs are more flexible. LLCs are usually used in a non-familial situation, syndications, and funds while LLPs and FLPs are used for control.
Charging Order Protection
The difference between companies and LLCs/LLPs is the charging order protection. This is the lawsuit protection aspect of these instruments. In a debtors exam, where many of your assets can be seized, attachment orders are issued. The only exceptions are limited partnerships.
Instead of an attachment order to seize, a charging order is issued which says that distributions made must go to the court to satisfy the ruling. The hope is that it forces a good settlement for the defendant, because distributions can be customized and deferred.
Why High Net Worth Individuals investing in syndications and funds should use an irrevocable trust or an LLC
Using an irrevocable trust or an LLC provides protection from lawsuits outside of the corporation, the corporate veil cannot be pierced here.
Why should people not use an online generalist LLC setup companies?
Going to a local and specialized firm will prevent you from missing out on several key foundational pieces such as the operating agreement, proper filing, issuing subscription agreements, and any resolutions needed for bank statements. It is often costlier to repair a poorly registered LLC than to incorporate your LLC properly the first time. Properly starting an LLC with a specialist will ensure that your business structure is best suited for your goals and strategy.