Beyond Charging Order Protection, Other Alternatives; Video Transcript
Today we’re going to talk about going beyond the charging order. In other words, how can we get another layer of protection or even more protection than you get with a charging order protected entity such as an LLC or partnership? Before you watch this video, I highly recommend you watch the video on LLC basics and what is charging order protection or what is reverse piercing .
So, just to give a quick recap on what a charging order is.
If you have a LLC or partnership and someone is suing you and you own, have an ownership percentage in that company, by law a creditor cannot get assets in the company. They cannot force assets out of the company. They cannot seize your ownership interest and they cannot gain control of the company. However, they can get a charging order and that entitles them to distributions from the company if and when the manager of the company decides to make those distributions. The creditor who has a charging order can get those distributions instead of you if you owe him money.
There are actually three types of trusts where if you put your LLC interest in the trust, the creditor is high and dry. They cannot even get a charging order against the LLC now because the trust doesn’t owe them anything and you don’t own that LLC interest anymore. Now, there are types of trusts that work for this and some that don’t. So, I’m going to list – in fact most trusts will not give you this extra layer of protection.
You really need to use these specialized trusts. So, the types of trusts that will protect and make it so a creditor cannot even get a charging order LLC and so he’s just flat out of luck. He has no recourse whatsoever to get your assets. Those three types of trusts are first, the Defective Beneficiary Tax Trust. We call it the DBETT. It’s also known as just the defective beneficiary trust in some circles or the beneficiary tax, irrevocable trust or the tier trust. It’s all the same thing. It means a DBETT.
There’s a Special Power of Appointment Trust called a SPA Trust and then there’s the offshore trust which can actually work pretty well for protecting domestic LLC interests but it works even better if you put a foreign LLC interest into your offshore trust. Now, one thing I want to explain to you. I’ll have to skip to the bottom of the slide is here’s how you know if a trust is not going to make the protection your LLC or partnership provides stronger.
If you use a self-settled trust, that’s not going to give you any protection with a few exceptions such as the OAPT. That’s the Offshore Asset Protection Trust or in narrow circumstances, Domestic Asset Protection Trust may work although usually we don’t use those because there’s a lot of loopholes and chinks in the armor with them. But what is a self-settled trust?
Well, if you have a trust where you put assets in the trust that makes you the grantor, you gift assets into the trust and then you remain a beneficiary of the trust or you benefit or enjoy the use of those assets in some manner you continued to do that. That’s a self-settled trust.
It means you’re the grantor and you’re the beneficiary. You keep benefitting from those assets. Under the laws of every, pretty much all 50 States with the exception of some States allowed Domestic Asset Protection Trust, there’s like 11 States that allow that but in all other States self-settled trust by law no asset protection.
The creditor can just go right ahead and get a charging order against that LLC interest in a self-settled trust and most of the time when people want asset protection, they still want to benefit from the assets. They don’t want to give it away to their children and never see it again. I mean, you can do that if you want to do estate planning. You get asset protection for your children there but you never see the assets again.
The three trusts I told you about, the SPA Trust, the DBETT and then the offshore trust, you can actually continue benefitting from trust assets but you are not – it is not a self-settled trust. You’re not both the grantor and beneficiary of the trust. You may ask well with those three special types of trust, how can I continue to benefit from those assets and it’s not a self-settled trust. That’s an excellent question.
There are some very advanced strategies we discussed for paid members only where we go into detail and we discuss what is a SPA Trust. How exactly does it work? What is a DBETT? How exactly does that work and, you know, how do offshore trust work? That’s reserve for our paid members or you can also get it from my book that discusses all that in depth which is also available to paid members. But let’s talk about a few other trusts.
These are the first three points on this page. It may give you some type of limited extra protection. They’re not as good as a SPA Trust, DBETT or offshore trust but it may give you some protection. One is the Intentionally Defective Grantor Trust. I discussed that in my book which is available to paid members.
It’s a very advanced estate planning tool but it’s widely known for estate planning attorneys that plan on an advanced level. It’s similar to the DBETT except basically the DBETT is specifically structured for even more asset protection. There’s another trust called an income only trust that may provide some limited protection. What an income only trust is you put assets into the trust but you don’t have right to get those assets back.
You only have the right to receive an annual payment of income from that trust. Well, in that circumstance even though you put the asset in the trust, you’re still getting income from the trust, a creditor can basically get whatever you can get and since you can only get the income from the trust but not the actual asset put in the trust then the creditor theoretically may be able to touch the income as it’s distributed to you but they can’t get the actual asset in the trust because you can’t own either. It’s kind of a partially self-settled trust and they can really only get the part that comes back to you which the income only.
A Domestic Asset Protection Trust, there’s 11 States that allows a self-settled trust to provide asset protection where you can be the grantor and the beneficiary and you get asset protection. Some of the more popular States are Nevada, Delaware, Alaska. Those are the big three but there’s also Oklahoma and it was actually 11 States that allow some type of domestic asset protection trust statute.
A couple of things you want to be aware of. First of all, if you don’t live in a State that allows these DAPTs, a judge is likely to disregard the protection and just say well we’re not going to apply Delaware trust law, we’re going to apply the trust law in our State because that’s where the case is taking place and guess what we don’t recognize those DAPT statutes so we’re just going to use our local law which allows us to get the assets inside those – of that trust and if your assets happen to be located in a State that is not a DAPT State, they’ll probably just going to grab the assets. There’s nothing to prevent them from doing that.
So, if you’re going to get a Domestic Asset Protection Trust, I would recommend that the trustee lives in a DAPT State. You live in those States and then the assets are in a DAPT State. Otherwise, it’s probably not going to work. Furthermore, these States that allow Domestic Asset Protection Trust, depending on the State, they pretty much tell you it’s not going to work for between two and four years.
For example, Utah where I live they have a DAPT statute and they say well you put the asset in this Domestic Asset Protection Trust, you know, asset protection the first four years. Only after it’s been there in four years already and if a creditor comes along after that, you get asset protection but furthermore, you have to pay a professional trust company for these DAPTs to work and that’s pretty much in every State I’m aware of that allows these types of trusts.
The minimum fee for that is usually $1500 a year so for my – if I was in Utah or maybe I was in Delaware, I have to wait four years and pay a trustee $1500 a year and I’m not even getting any protection in those years.
Also, if I declare bankruptcy, if the trust isn’t at least 10 years old, I get no protection in bankruptcy. So, there’s a lot of holes with these domestic asset protection trusts. You can put your LLC interest in there and, you know, if you live in a State with this DAPT legislation, a good chance it might work after four years or two years or whatever the grace period they have before the asset protection kicks in but you have to pay a professional trustee.
Sometimes it’s – even with these other trusts, it’s a good idea to have a professional trustee. You need one for offshore trust of course as well. But just be aware with the DAPT absolutely. You have to have professional trustee and then there’s all these other issues so be careful if you’re going to use that type of trust.
With that said, I’ve kind of introduced you to some of the advanced tactics that very few planners know how to use that will make it so that a creditor has absolutely no recourse against any of your investments or business assets because not only is it protected by the LLC but you don’t even own the LLC anymore and they have no way to get anything inside that trust if you do it right and that’s how you enforce your charging order protection.
I hope you found this information useful. Thanks for your time.