Legal Structures For Asset Protection: Trusts, LLCs, And Corporations

Various strategies exist that can help people legally safeguard their assets; each of these approaches differs in terms of benefits and security. Some examples of legal vehicles utilized to protect assets include trusts, corporations, and limited liability companies (LLCs). Understand the different legal structures available for asset protection, and discover how a seasoned Arizona estate planning lawyer can help people effectively protect their property from creditors, lawsuits, and other claims; call Harrison Law, PLLC today at (480) 320-2310 to discuss your legal queries in confidence.

What Is Asset Protection?

Protecting assets requires the use of legal tools and strategies aimed at shielding a person’s wealth from external threats, such as creditors, personal liabilities, economic shocks, and claimants of lawsuits, which can also maintain individuals’ privacy, defer their income, and mitigate taxes. These strategies attempt to limit access to these assets and preserve the financial future of an individual and their loved ones while usually still providing the person implementing these approaches with ownership rights and control. Without effective protection, a person’s assets could become diminished or seized, impacting their financial well-being.

Which Business Structure Is Best for Asset Protection?

Many legal structures may assist in safeguarding assets, such as corporations, trusts, and LLCs, each of which has its own benefits, drawbacks, and unique characteristics. The ideal business structure to opt for typically depends on a person’s requirements, goals, risks, and specific circumstances. Below is an outline of these asset-safeguarding structures.

Corporations

Corporations are businesses legally owned by shareholders, through stock shares, and according to the Internal Revenue Service (IRS), established per state laws through the submission of articles of incorporation. The shareholders usually approve a board of directors (which elects the organization’s operational officers) that is responsible for managing the corporation; depending on the state, it is possible for a single person to fulfill all of these roles. Several types of corporations may help to safeguard assets, including S and C corporations; below is an explanation of how limited liability given to corporations’ shareholders, officers, and directors can help protect these individuals’ assets, as well as the key differences between S and C corporations.

Limited Liability for Corporation

Corporate decision-makers, known as principals, are generally not personally liable for contractual breaches, corporate debts, and injuries sustained by third parties as a result of the actions of the corporation, its agents, or employees. In these scenarios, a creditor or other external party may only seek to make a claim against the corporation’s assets, distinguishing this business structure from others such as general partnerships, which afford no such protection.

A notable exception where corporate principals may not benefit from limited liability concerns providing personal services, such as work completed on behalf of or for someone else by financial professionals, doctors, accountants, and attorneys. For instance, a doctor establishing and working for a corporation may still incur damages concerning medical malpractice despite their association with a corporation. Furthermore, liability protection is only available provided the corporation is a separate entity, distinct from the corporation’s officers and shareholders; creditors may be able to “pierce the corporate veil” and reach the assets of a corporation’s shareholders and officers if the corporation lacks its own assets and is not actually acting separately from these parties.

Differences Between S and C Corporations

The key difference between C and S corporations is that S corporations also acquire a tax benefit that enables corporate profits to pass through to shareholders, which are then taxed at this level. Both S and C corporations gain similar liability protection, but S corporations have more stringent requirements compared to C corporations related to shareholder numbers and types, the stock types the business may provide to investors, and the allocation of profits and losses among shareholders.

Continue this discussion with an experienced Arizona estate planning attorney and improve your understanding of legal asset protection strategies. Schedule a confidential consultation with Harrison Law, PLLC today to get assistance with crafting effective estate plans.

Trusts

Trusts are legal arrangements between the individual setting up the mechanism, called a grantor or settlor, and another party (an individual or entity) with the responsibility of managing the trust’s assets, referred to as the trustee. In these arrangements, the grantor moves their assets to the trust, and the trustee manages them on the grantor’s behalf to benefit the trust’s beneficiaries. Many types of trusts exist, including living trusts, established during the settlor’s lifetime, and testamentary trusts, which come into effect when the grantor dies.

Regarding the protection of assets, there is an important distinction between irrevocable and revocable trusts. The latter gives the grantor the ability to amend or dissolve the trust at any point, whereas the former does not provide this. Irrevocable trusts can be effective tools for protecting assets since any wealth transferred to them is no longer part of the grantor’s estate, as the settlor has no control over these assets, which means external parties cannot seek to seize or diminish these assets.

Does a Limited Company Protect Your Assets?

LLCs, defined by the IRS as businesses permitted by state law and owned by individuals, other LLCs, international entities, and corporations, called members, are company structures that can effectively safeguard assets thanks to the concept of limited liability, which separates owners’ assets and liabilities from that of the company; this means the owner’s personal assets are safe from claims against the company’s assets and debts. LLCs also provide flexibility in terms of profit distribution and make it easy to implement varied management structures; the owners also benefit from pass-through taxation, which means they can avoid double taxation by passing through the company’s profits and losses to their own tax returns, but the owners could still incur self-employment tax. Additionally, setting up an LLC is typically easier compared to an S or C corporation.

Worth noting is that the separation between the assets and liabilities of the company and owners is not insurmountable; for instance, if an owner personally guarantees a company loan, commits fraud, or mixes their own assets with that of the business, creditors and other external parties can pursue the owner’s assets. To prevent this, consider getting extensive liability and professional insurance, maintaining a clear separation of personal and business assets, keeping thorough records, adhering to reporting requirements, and taking out credit in the business’s name.

Other Asset Protection Strategies

Rather than relying on a single structure to protect their assets, individuals can use a combination of different entities for this purpose. For instance, they could transfer their real estate to an LLC while running a company through a separate corporation to split their liabilities and shield their personal assets. Additionally, consider combining the use of domestic and international structures; the former involves employing legal structures based in the United States to safeguard assets, and the latter entails establishing legal vehicles, such as LLCs and offshore trusts, and moving assets overseas to favorable jurisdictions.

Legal Considerations of Using Structures for Asset Protection

One key consideration of utilizing asset-protecting legal structures is to make sure the vehicle complies with state and federal regulations, such as those related to report filing, following operating guidelines, and paying necessary fees. Alongside this, consider reviewing any asset-safeguarding strategies every year, after experiencing significant financial changes, or after substantial legal developments.

Some common mistakes to avoid when establishing legal structures to protect assets include not mixing business assets with personal ones, since this could potentially counteract liability protection, and inadequate record-keeping, as this may result in financial and legal complications. Another potential pitfall is not adhering to regulatory requirements, which may result in legal penalties, fines, and lost limited liability protection.

Arrange a Consultation With an Experienced Arizona Estate Planning Attorney To Find Out More

Implementing strategies for protecting assets, such as establishing trusts, corporations, and LLCs, can help safeguard a person’s wealth from possible threats while also giving tax advantages and flexibility. However, to remain effective, it is necessary to set these vehicles up correctly and regularly update them to ensure they continue to provide adequate protection and remain legally compliant with changing legislation, which is where consulting with an attorney may help. Learn more about asset protection strategies, and find out how Harrison Law, PLLC might aid people with safeguarding their wealth; contact our legal team today by calling (480) 320-2310 to speak to a Gilbert estate planning lawyer.

© 2024 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.