Keep Your Personal Creditors at Bay

Cynthia Umphrey
October 8, 2008 — 1,501 views  
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It's no secret many of us are currently experiencing a rough financial ride.

Some protective steps taken now may go a long way toward covering your downside.  The best time to engage in protecting your business and personal assets is long before you have problems.  The closer you are to trouble, the more likely it is that your protective tactics will be undone.

Also, there are many traps you can fall into if you pay one creditor in preference over others or move money around when a creditor issue is coming to a head.

Here are a few thoughts on steps you can take to protect against potential creditors.  Please note none of this is really "do-it-yourself" since executing it properly can be pretty complex.

-- Form a multi-member L.L.C.  Most people think of an L.L.C. as protecting their personal assets from problems the L.L.C. may encounter.  But an L.L.C. can also provide the reverse service by protecting the L.L.C. assets from your personal creditors.

This is because your personal creditors, under current law, would be able only to obtain a charging order against your right to distributions from the L.L.C.  This means that the creditor will not own your interest in the L.L.C. and so cannot reach its underlying assets.

This is especially useful if you can limit or stop distributions while you deal with your creditor issues.  It improves your ability to negotiate down debts.  However, for this reverse type of creditor protection, it is always best to have an L.L.C. with more than one member.  If you already have an L.L.C. of which you are the sole member and have potential creditor issues, try to find a person to buy an interest in it at its fair market value.

Observing the formalities of the L.L.C. and truly treating it as a separate entity is also key.  An L.L.C. need not always own classic "business" type of assets and even marketable securities and cash may be protectable by an L.L.C. if handled properly.

-- Form an L.L.C. with a tax twist.  You can form an L.L.C. for state purposes, but elect S-Corporation Status for tax purposes.  Then you get the tax treatment you desire, but get the creditor protection described above.

-- Own things as tenants by the entireties.  This is like creditor protection times two.  In Michigan, as well as other states, real estate and certificated securities owned by a husband and wife as "tenants by the entireties" are out of reach of the creditors of only one spouse.  This can be a valuable planning tool.  Example: An L.L.C. can be formed and the certificate issued to husband and wife as tenants by the entireties to provide this extra layer of protection.

-- Beef up the retirement plans and other generally exempt assets.  Most retirement plans are hands-off for creditors.  So, if you see tough times ahead, maxing out retirement contributions is a great plan, as is paying down the mortgage on any entireties-owned real estate, or increasing investments into other creditor protected items such as an L.L.C.

-- Establish an Asset Protection Trust.  You may be able to establish an Asset Protection Trust to further shield assets from creditors, even when no other exemptions apply.  States like Alaska and Delaware are jurisdictions that claim to offer creditor protection for self-settled trusts.  There is a lot of commentary that disputes how well these work, but they are often worth considering if you do not want to go offshore.

For further information regarding these matters, please contact Ms. Umphrey at [email protected] or 248.619.2591.

Cynthia Umphrey

Kemp Klein Law Firm

Cynthia Umphrey helps families and business owners make significant personal and professional life decisions. Ms. Umphrey calls upon over 10 years of experience in estate planning, probate administration, business structuring and business exit planning to guide you though life's most important choices.