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Summary – How all the Asset Protection Pieces Fit Together

Here is an example of how the asset protection plan operates from a practical standpoint. James and Mary Prudence have accumulated a nest-egg of $200,000 in various mutual funds for their retirement. Together they own and operate a fast food restaurant. They have no lawsuits and no potential claims against them. They want to make certain that their savings are protected in the event of any future difficulties.

They form the Prudence Family LLC and they serve as 99% members. A Trust Company affiliate in the Cook Islands acts as an additional member, holding a 1% interest.

James and Mary transfer the mutual funds into the name of the LLC. This is a very simple matter that takes only a few minutes. They maintain a regular checking account, outside of the LLC, which they use to pay their normal monthly expenses. Any surplus goes into the LLC account. This arrangement does not have any income tax or gift tax consequences. Ninety-nine percent of all dividend or interest income earned by the LLC is reported on James and Mary’s income tax return. The remaining one percent (approximately $140) is allocated to the International Member as a fee for their services. There are no tax savings or disadvantages.

Similarly, there are no gift tax consequences. Since James and Mary have full control over their property, there are no gift tax implications to this set up.

Now let’s see what happens if there is ever Someone who is thinking about suing James or Mary. As we have seen, the plaintiff’s lawyer will want to know whether it is worth his time and money to pursue James and Mary in a lawsuit. When he performs an asset search, he is unable to locate any property in the name of James and Mary, since they have previously transferred their property to the LLC. It is very unlikely that he would proceed at this point.

But let’s say that the lawsuit is filed and James and Mary lose. Now what happens?

Remember, after the lawsuit the collection process begins with a Debtor’s Examination, with detailed questions concerning the sources of income and the location of assets. Clearly, if James and Mary had not transferred their assets into the LLC, the judgment creditor would simply have levied on their account and taken all of their retirement savings. There would be no room to negotiate and no leverage to attempt to work out a deal or a payment schedule. Under normal circumstances a Creditor with a judgment has complete control over your assets.

Now the situation is quite different. First of all, James and Mary will truthfully answer all of the questions in the judgment debtor exam. They will state that they have created an LLC. The purpose of the arrangement is not to hide or conceal assets from a creditor, but to provide legal protection, allowing you to answer all questions truthfully and completely.

Now that the plaintiff knows how the assets are held, what does he do? Will he be able to collect on his judgment? The plaintiff would like to seize the assets in the LLC account but he cannot do that. As we have discussed, a creditor is not permitted to reach the assets of an LLC.

What is the next move? Could the plaintiff try to compel James and Mary to liquidate the LLC? The operating agreement provides that the consent of all members is necessary to liquidate and since the International Member is outside of United States jurisdiction it cannot be compelled to perform any act by a United States court. Could the plaintiff go to the Cook Islands and enforce the judgment there? Again, the answer is no. The law of the Cook Islands specifically provides that a judgment of a foreign court cannot be enforced in the Cook Islands. The assets in the account are safely protected. They can remain in the United States or transferred to the Overseas account and the result will be the same.

At this point the creditor will certainly be willing to settle for pennies on the dollar. James and Mary can now choose to settle on their terms, if they wish.

As a practical matter, James and Mary clearly produced a very successful result. They set up their plan before any problems existed and as a result their valuable assets and retirement nest-egg were safely shielded and protected from potential disaster.

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Asset Protection for Physicians and High-Risk Business Owners by Robert J. Mintz JD, LLM

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