LLC’s versus Trusts

Many of the weaknesses of trusts are made apparent in the How Not To Protect Assets section of this website, so we will just touch lightly on trusts in this section. Generally speaking, trusts are not a very good asset protection device. Self-settled trusts (a.k.a. “asset protection trusts”, whether onshore or offshore) are an especially bad way to protect assets. The reasons for this are:

  • Trusts are usually expensive to set up and maintain.
  • A properly set up trust (if it is an irrevocable trust used to protect assets) requires someone else to have control of your assets. More than a few people have put their liquid assets into an offshore trust, and then had the trustee run off with their assets!
  • Trusts are inflexible.
  • Assets are transferred to a trust by gifting, instead of a for-value transaction, which increases the likelihood of a fraudulent transfer ruling.
  • It is often difficult to explain why someone set up an asset protection trust (especially an offshore AP trust) for any other reason than to evade or delay payment to creditors, which makes the trust even more vulnerable to a fraudulent transfer ruling.

There is one type of trust that can be a good asset protection tool. It is called a spendthrift trust, and these trusts are typically supported by state laws that limit a creditor’s right to the trust’s assets to distributions of earnings from the trust.  Since an LLC has this same asset protection feature, is more flexible, and is easier/cheaper to set up and maintain, PF Shield does not use spendthrift trusts. If you wish to have a spendthrift trust set up, please consult with a competent attorney.

THE LAND TRUST OR PERSONAL PROPERTY TRUST

There is another little-known trust that PF Shield will sometimes recommend to a client, which is to be ideally used in conjunction with an LLC or other limited-liability entity. This trust is called a Land Trust or a Personal Property Trust. It is a type of revocable living trust, wherein the beneficiary retains the ability to make decisions regarding the management of the trust’s assets, and the trustee merely executes/acts as signor on pertinent documents. This type of trust does NOT protect one’s assets, however it can be useful in providing an additional layer of privacy when one is using an LLC for certain activities. For example, if your LLC membership interest is held in a personal property trust, and you find yourself on the witness stand as a defendant in a civil lawsuit, a lawyer may ask you the following question:

“Do you have a membership interest in such-and-such LLC?”

If your membership interest is held by this trust, you can honestly answer “no” and maintain your privacy. Of course, the lawyer could ask if you have a beneficial interest in a trust that has a membership interest in such-and-such LLC, and then you’d have to answer in the affirmative (unless the trustee is an attorney; then you would probably benefit from the attorney-client privilege, and would therefore not have to answer that question!) However, in most cases the  existence of this trust would be a complete secret in the first place, and even if the trust’s existence was not a secret, the vast majority of lawyers are not skilled enough to think to ask this type of question, since Land Trusts/Personal Property Trusts are not very well known.