With the stock market still reeling in the
aftermath of the September 11th tragedy, real
estate is gaining favor among the most died-in-the-wool
securities investors. The downside is that real estate, just
like stocks and bonds, is subject to market volatility brought
about by economic pressures. Unless we have the power of Alan
Greenspan, we have no control over market volatility. What we
can do, however, is provide a double layer of protection for
real estate and other assets by following a model used by wise
investors.
As anyone who has been sued will attest, every
asset you own is worth pursuing by a desperate, determined
plaintiff. In fact, plaintiffs make up the second largest
group of creditors, surpassed only by the IRS. The most
effective shield for assets is a limited liability company, or
LLC. A relatively new type of legal entity, most lawyers
prefer an LLC over family limited partnerships,
S-corporations, and C-corporations. Arizona’s legislature
enacted a limited liability company law in 1993 and has
amended and improved it twice since then. Ours is now the
strongest LLC law in the country because of the asset
protection that it mandates.
If an employee
of an LLC causes a liability while on the job, any judgment
awarded to a plaintiff is limited to the assets the LLC owns.
The plaintiff cannot go after other assets held by the owner
of the LLC. For example, Mr. and Mrs. John Doe own $1,000,000
in assets, including real estate, securities, and the J.D.
Landscaping Company. An employee of J.D. Landscaping causes a
serious accident, killing a man. The deceased man’s wife
retains an attorney to sue Mr. and Mrs. Doe. After some
preliminary research, the attorney informs the widow that the
situation looks grim because Mr. and Mrs. Doe had done some
prudent estate planning.
Strategy for Protection
Several years
before the accident, the Does formed the John Doe Living
Trust, which owns their personal residence. Next, they formed
the Cool Pines LLC to own their mountain cabin. Another
limited liability company called Doe Family Investments, LLC
was set up to own all of their stocks, bonds, and mutual
funds. Finally, they formed J.D. Landscaping, LLC, which owns
two trucks and yard equipment used by the landscaping company,
valued at $100,000. The John Doe Living Trust—not Mr.
and Mrs. Doe—owns Doe Family Investments, LLC, Cool Pines,
LLC, and J.D. Landscaping, LLC.
Disappointed Plaintiff
The widow’s
lawyer files suit against J.D. Landscaping, LLC, takes the
case to trial, and wins a $1,000,000 judgment. However, what
looks good on paper is devastating to the widow. As noted
above, Arizona’s limited liability law, ARS 29-655, states
that an injured party’s exclusive remedy is to attach the
assets owned by the LLC that caused the liability. The most
the widow can collect is $100,000 worth of trucks and
equipment that J.D. Landscaping, LLC owns. She cannot collect
the remaining $900,000 from Mr. and Mrs. Doe, because their
other assets are protected.
Extra Layer of Protection
The Does’
estate planning could have been better, however. If they had
formed two limited liability companies for their landscaping
company, they could have had bulletproof asset protection. LLC
#1 would own the trucks and equipment and lease them to LLC
#2, which would perform the landscaping service, but own no
assets. Because LLC #1, the leasing company, is not involved
in the daily operations of the landscaping business, it would
be highly unlikely for any of its employees to cause a
liability. Employees of LLC #2 could cause liabilities, but
since the company owns no assets, any judgment it incurred
would not be collectable. In no way is this strategy meant to
encourage injurious parties to abdicate their
responsibilities, however, Arizona’s LLC law is designed to
restrict liability which as a result may encourage reasonable
settlements.
Protecting Investments
The Doe Family
Investments, LLC is smart strategy for anyone with even a
modest securities portfolio. If, for example, Mr. and Mrs.
Doe cause a car accident, they can be personally sued and the
injured can get a judgment against them. The Plaintiff can
pursue any equity in the Doe’s home that exceeds $125,000, but
he cannot collect a dime from the Doe Family Investments, LLC,
Cool Pines, LLC, or J.D. Landscaping, LLC. Since none of
these companies caused the liability, Arizona law protects
their assets. On the other hand, if the assets were simply
held in the John Doe Living Trust and not protected by an LLC,
they would be subject to the judgment.
Double Plate of Armor
So don’t
settle for a little protection when the law allows you to have
much more. Start with a basic revocable living trust, and
assign it ownership of one or more limited liability companies
which hold your assets. A revocable living trust is still the
best vehicle for leaving your estate to the beneficiaries you
designate. A trust will enable your heirs to avoid the long
and costly process of probate. Probate often takes twelve
months or more and costs the estate thousands of dollars. A
living trust may also reduce your estate taxes significantly
for the next eight years. The new federal estate tax law
passed this year provides for total repeal of estate taxes in
2010, but it’s anybody’s guess what bite estate taxes will
take the following year.
One of the
most significant advantages of a living trust, with or without
estate taxes, is that it allows married couples to protect
assets from creditors after the first spouse dies. In the
year 2002, a living trust will protect and preserve at least
half of a $2,000,000 estate for the surviving spouse and
children after the first spouse dies. The amount that can be
protected grows to $3.5 million in 2009. In 2010, when there
is a one-year window of no estate taxes, living trusts will be
able to protect half of any size estate after the first spouse
dies.
Living trusts
provide for a smooth transfer of your estate without the
interference of the courts, lawyers, or unhappy beneficiaries
and descendants. You can dictate who receives your assets,
when the assets are received, and under what circumstances.
This is especially important if one or more of your heirs is
chemically dependent, in trouble with the law, has creditor
problems, or faces bankruptcy. Owners of very small estates
may consider beneficiary deeds or transfers on death if they
do not have special wishes or circumstances to be addressed.
But these methods allow for none of the protection or
advantages outlined above.
In today’s
litigious society, you’re taking a huge risk if you fail to
protect your estate. Limited liability companies and revocable
living trusts go together like love and marriage, chips and
salsa, and the Diamondbacks and the World Series.
Bill Gibney is
an estate-planning attorney, practicing in Phoenix. His
specialty is asset protection. He can be reached at
602-953-0006 or at gibneylaw@cox.net..
