case changed the existing laws so that all IRAs are asset protected in a “bankruptcy” case. That sounds great, except 95% of the people who buy this book will not be in a position to file bankruptcy due to their amount of wealth. Therefore, it is my opinion that the recent Supreme Court case is of little good to those clients who live in states where the IRA is not fully protected by state law.
Solution. For those who have money in IRAs in states where they are not protected, the simple solution is to create a family limited partnership or limited liability company, name yourself a manager (which is an employee), start an ERISA protected profit sharing plan (PSP), and roll your IRA to the PSP. This will protect the assets in the IRA.
Typical Asset Protection Solutions (that do not always work)
Co-ownership comes in many forms, and most clients, and some attorneys and CPAs, believe that through co-ownership a client can adequately protect his/her assets.
Technically speaking, co-ownership can protect your assets. There are a number of problems associated with co-ownership that make its use not viable for many clients. There are many pros and cons with co-ownership that I do not have time to cover in this chapter.
Types of Co-ownership. There are three main types of co-ownership: Tenants in Common, Joint Tenants, and Tenants by the Entirety. Let me summarize the problems of each:
1) Joint Tenancy (JT)—A JT is the worst type of way to own property. With a JT, you typically own the property with one or more other people, but you all share a right to the “whole” property. This means that any one owner can leverage the property without consent of the other owners. What’s worse is that an interest in property owned as a JT is subject to the claims of your creditors (as it is with the other JTs and their creditors). This means that your interest in a property owned as JT with other JT owners is subject to their creditors. This is a disaster from an asset protection point of view.
Also, when you hear the term JT, you typically think of the term “with rights of survivorship.” Without getting too detailed, if you own a piece of property as JT with rights of survivorship, if you happen to die before the other joint owner(s), your heirs will receive NOTHING. That’s right. JT with rights of survivor is a gambling on life tenancy. Since most people want their interest in property to pass to their heirs, using a JT with rights of survivorship is not the tenancy you use.
Unfortunately, this is the most common way to own property. Be careful if you are working with advisors who recommend JT as a way to own property (because they know nothing about asset protection and will give you advice that is not in your best interest).
2) Tenants in Common (TIC)—TIC is virtually the same as owning property in a JT (meaning your ownership in the property is subject to your creditors and that of the creditors of the other owners). However, the good thing about owning property as a TIC with another owner is that your interest in the property can be passed to your heirs upon death (unlike a JT where you have to be the last person living in order to have the property pass to your heirs).
The bottom line with both JT and TIC is that neither should be used as a way to own property.
Corporate Entities
Most people think that great asset protection comes through the use of “corporations.” What most people do not realize is that there are different types of corporations and limited liability companies; and depending on which entity you chose, your asset protection and tax consequences could be different.
Sole Proprietorships. Sole proprietorships are the second worst way to own or run a business, behind a partnership.
Basically, a sole proprietorship exists when an individual operates a business without filing to have that business recognized as a legal corporate entity (like an S- or C-Corp or a limited liability company or professional company).
With a sole proprietorship, there are no barriers between the business done and the individual running/owning the business. Why is this bad? If a sole proprietor, acting on behalf of his business, commits negligence in his duties for the business that causes injury to a third person, the sole proprietor is personally liable for any and all injuries to that third person.
If the business puts out a product and the product malfunctions, thereby causing injury to some third party, the sole proprietor is personally liable for that injury. If an employee of the business harms a third person when acting within the scope of his/her employment, the sole proprietor is personally liable for the injury. If someone is harmed on the business premises (say for a slip and fall injury), the sole proprietor is personally liable for the injury.
When a sole proprietor is personally liable for any of the above examples, all of the sole proprietor’s personal and business assets are subject to claims by the creditors (the people who sue the sole proprietor’s business).
Conclusion. Don’t ever be a sole proprietor.
Partnership. A partnership is the absolute worst entity you could possibly be involved with from an asset protection standpoint. With a partnership, you get all the headaches and personal liability of a sole proprietorship with the additional twist of having a partner who can cause you even more liability.
Definition: A partnership exists when two or more people run a business together that is not a “corporation” (like S- or C-Corp or LLC or P.C.).
Consequences of being a Partnership—Every partner is liable for all the actions and debts of the other partners (as it relates to the business).
A few examples are the best way to illustrate the problem.
1) If one partner signs for a loan on behalf of the business and takes the money and blows it on a trip or drugs or whatever, the debt becomes the debt of the partnership (and, therefore, ALL the partners are personally liable for the debt).
2) If one partner sexually harasses an employee and the business gets sued for sexual harassment, the suit is against the partnership in which both partners have personal liability.
Conclusion. Never be a partnership.
Corporations
(not Limited Liability Companies or Professional Companies)
General information about formation and structure. Corporations are a legal entity formed under state laws. Corporations are owned by shareholders.
Shareholders elect a board of directors, which is responsible for overall management, and hires corporate officers to run daily operations of the corporation. A corporation can have as few as one shareholder who can elect himself to the board and can run the daily operations of the corporation.
A corporation can be either an S- or C-Corp.
Limited liability. The main reason businesses are corporations, not partnerships or sole proprietorships, is to avoid personal liability for negligent actions of the corporations. This includes limited liability of the corporate shareholders as well as individual liability of the employees of the company who are acting within the scope of employment.
Example:
