Overview of the Assets your LLC Can Shelter
Your limited liability company can own any asset that you can title to
a limited partnership. In practice, we prefer the limited liability company
to title more dangerous (liability-producing) assets since LLC managers
will be fully protected personally from the LLC debts, while the limited
partnership's general partner would have personal liability. We use
the limited partnership to title and protect safe assets. The limited
partnership has been battle-tested for nearly a century, whereas the limited
liability company is newer and has not been as extensively tested. But
a limited liability company is desirable to own:
— Second homes and vacation homes
— Commercial real estate
— Cars, boats, planes, etc.
— Equipment and other physical assets
— Operating businesses
We sometimes have a single-member limited liability company own a primary
residence. We will particularly use the LLC to avoid an attachment of
a home by a judgment creditor. You may ask that if both the limited liability
company and the family limited partnership can equally protect such a
variety of assets, why not title your home to a family limited partnership
or multi-member limited liability company to gain the same charging order
protection? Some asset protection planners do recommend titling the family
residence to a limited partnership, but you then lose your tax benefits.
You can only preserve your family residence tax benefits by titling your
home to a single member limited liability company.
As a single individual, you have a $250,000 capital gains tax exclusion
on profits when you sell your home. If a family limited partnership owns
your house for more than three out of five years, you lose your tax benefit.
You could transfer your home to a family limited partnership for no more
than three years and then retransfer the home to your own name for at
least two years, but this is impractical.
An alternative is to have a single-member limited liability company own
your home. If you are married, one spouse (usually the less liability-prone
spouse) would be that single-member. Since the IRS disregards single-member
limited liability companies for tax purposes, the home should, at least
for capital gains purposes, be treated as if the home were owned in the
name of the individual member. You cannot achieve this tax strategy with
a limited partnership, which by definition requires at least two owners
and therefore cannot be a disregarded entity. Review this strategy with
your tax advisor.
It is possible to achieve this same tax strategy with a limited partnership,
if you use either a grantor trust or an LLC as one partner, and the trust
grantor or LLC owner as the second partner. Because a trust may not provide
limited liability as a general partner, it makes sense to instead use
an LLC. It's pointless to use a limited partnership instead of an
LLC, if you need to use an LLC with the limited partnership to achieve
your goals anyway. It's much easier to simply use an LLC and a grantor trust.
When an LLC is to hold your personal residence, you must be aware of the
home loan's due-on-sale clause. We are frequently asked by clients
about this clause (standard in most mortgages), which requires the mortgage
lender to consent to any transfer of the property (to a limited liability
company or otherwise). Lenders routinely consent to such transfers, unless
the borrower is in default on the mortgage or you are paying lower than
prevailing interest rates. Not once did we have a lender actually foreclose
because of the transfer. Further, there are cases that have upheld the
right of an owner to transfer property to an LLC or FLP that is owned
by the same party, even without the consent of the mortgage holder.
Nonetheless, if it appears that a due-on-sale clause may cause problems;
federal law allows us to transfer the property to a living trust (which
may be irrevocable) without triggering the clause. Although a trust usually
provides little or no asset protection (particularly if you continue to
enjoy use of the property), we can encumber the property with additional
liens, which act as a debt shield against subsequent creditor claims.
We use a trust for privacy and estate planning. We use a debt shield for
asset protection. And we can build a solid program that your lender is
Our overriding strategy is to segregate as many of your assets as possible
into separate limited liability companies. For instance, if you own ten
apartment houses, you would title each in a separate limited liability
company. Or we would use a Series LLC. Your ten limited liability companies,
or cells in the Series, may be owned by one family limited partnership.
Your limited partnership may be owned by your living trust. You can then
bequeath your estate without probate while at the same time maximizing
the protection for your respective entities. With layering, you accomplish
different financial objectives. The LLC is usually an essential component
to this layering process.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to