The Assets Your LLC Can Shelter

An LLC can own any asset that a limited partnership can own. LLCs are ideal for holding title to more dangerous (liability producing) assets because LLC managers are fully protected personally from the debts of the LLC, while a LP general partner would have personal liability. Our preference is to use the LP to protect safe assets because it has a longer history of court testing than the LLC. That being said, the LLC is an ideal entity to hold title to:

• Operating businesses.
• Second homes and vacation homes.
• Commercial real estate.
• Cars, boats, planes, etc.
• Equipment and other physical assets.

As legal advisors, we frequently recommend that a single-member LLC owns a primary residence to avoid the attachment of a home by a creditor that is successful in getting a judgment. Some Asset Protection planners recommend titling a family residence to a limited partnership, but you then lose the tax benefits. You can only preserve your family residence tax benefits by titling your home to a single member LLC.

Individual homeowners are entitled to a $250,000 capital gains tax exclusion on profits when you they sell a home. If a family limited partnership owns a home for longer than three out of five years, the tax benefit is lost. While one could conceivably transfer a home to a family limited partnership for no more than three years and then re-transfer the home to an individual's name for at least two years, but this is impractical and risky.

An alternative is to have a single-member LLC company own your home. If you are married then, one spouse (typically the less liability-prone husband or wife) would be the "single-member." Since the IRS disregards single-member LLC's for tax purposes, the home should (at least for capital gains purposes) be treated as if the home were owned in the name of the individual member. A LP will not achieve this tax strategy because a LP requires at least two owners and therefore cannot be considered a disregarded entity. This and all other home titling strategies requires careful consideration with a legal advisor.

When an LLC is used to hold a personal residence it is important to carefully understand any due-on-sale clause of a mortgage or home loan. This clause is standard in most mortgages and requires the mortgage lender to consent to any transfer of the property (to a LLC or otherwise). Lenders commonly agree to such transfers unless the borrower is in default on the mortgage or they are in a loan with lower than prevail interest. In our many years of practice we have never seen a lender actually foreclose because of the transfer and we are aware of legal cases that have upheld the right of an owner to transfer property to an LLC or FLP that is owned by the same party, even without the consent of the mortgage holder.

If it appears that a due-on-sale clause may be problematic, federal law allows the transfer of any property to a living trust (which may be irrevocable) without triggering the due-on-sale provisions of a mortgage. Unfortunately, a trust typically provides little or no Asset Protection (particularly if the owner continues to enjoy use of the property after transfer to the trust), but it is possible to encumber a property with additional liens that act as a debt shield against subsequent creditor claims. It is our preference to utilize trusts for privacy and estate planning and to use debt shields for Asset Protection—and creating a solid asset protection program that any leader would be pleased with.

Our general strategy is to segregate as many assets as possible into separate limited liability companies. For example, if you owned ten apartment houses we would advise you would title each in a separate LLC. Or, we would form a Series LLC in which your ten limited liability companies (or "cells" in the Series) may be owned by one family limited partnership.

Your limited partnerships may be owned by your living trust, in which case you can make a bequest of your estate without probate while simultaneously strengthening protection for your respective entities. Using a layering strategy you achieve many different financial objectives and the LLC is frequently an essential component of this layering process.

PROTECT YOUR ASSETS TODAY!