Corporate stock is not in and of itself safe from a stockholder’s creditors. Therefore, additional steps must be taken ensure the stock’s safety. Your options include the following:

• Married couples may transfer their corporate shares to the less vulnerable spouse, who would then own the stock and control the corporation. This is very easy to do, but is probably not the best solution, since gifting is vulnerable to a fraudulent transfer ruling, and since doing so places you at greater risk of losing the corporation should you divorce your spouse. However, since one may make unlimited tax-free gifts to his or her spouse, at least this is a tax-neutral option.

• Transfer the shares to an LLC or limited partnership. If done before creditor threats materialize, this is an excellent strategy that has several advantages. First, a transfer to an LLC or limited partnership (which could be domiciled either in the U.S. or offshore), if done as a capital contribution, is a tax free event. Second, the ownership interest of a properly structured LLC or limited partnership may not be seized by a creditor. Third, in most instances you may act as manager of the LLC or LP, and thus retain control of your corporate stock while still protecting it. You may also remain a director or corporate officer of the corporation if you desire. There is one caveat to this approach, however: only an entity that is structured so as to be disregarded for tax purposes from its owner (which must be a natural person who is a U.S. citizen) may own the shares of an S corporation (any entity may hold a C corporation’s stock). However, it is possible to structure even a multi-member LLC or LP so that it is taxed as a ‘disregarded entity’ and the IRS has allowed such an entity to hold S corporation stock without endangering the corporation’s subchapter S tax election. Note that it is not possible to structure a family limited partnership (FLP) as a disregarded entity if one wishes to avail themselves of the estate tax reduction benefits of such an entity.

• Transfer the corporate shares to an irrevocable trust set up for your children or other beneficiaries. This tactic, of course, means in most states you could no longer receive the benefits of stock ownership (such as voting rights and cash dividends) in either a direct or indirect manner. If you continue to benefit, even indirectly, from stock ownership, then the trust would essentially be self-settled (a self-settled trust is a trust where the person who transfers assets to the trust continues to benefit from the assets). Self-settled trusts by law do not provide asset protection in 42 of the 50 states.

• Title your shares as tenants by the entirety. Tenancy by the entirety is a type of joint ownership, allowed in about half of the states, wherein a husband and wife may jointly own property. If one spouse dies, the other automatically becomes the sole and complete owner of the property (this is called ‘right of survivorship’). Neither spouse can sell or otherwise transfer their interest in the property without the other’s consent. In many states that allow this type of ownership, the property may be attached only when both spouses are subject to creditors. If you co-own your shares with your spouse in a state that allows tenancy by the entirety interests, then this strategy may give your stock ownership sufficient protection when only one spouse has creditors. However, tenancy by the entirety does not offer complete protection (it will not protect an asset from the IRS, for example) and therefore an even better (and perhaps optimal) arrangement would be to transfer the stock to an LLC or limited partnership, and then hold the LLC or limited partnership’s interest as tenants by the entirety.

• Assess your shares. If your shares are not fully paid or if the shares are assessable by the corporation, then a creditor who seizes your shares takes them subject to your obligation to pay the assessment. Obviously, a potential assessment by the corporation reduces the value of the shares to your creditor by the amount of the potential assessment. An ‘assessment’ can be a particularly effective ‘poison pill,’ and we frequently include ‘assessment provisions’ in corporate documents as an anti-creditor device.

• Issue irrevocable proxies. A proxy is an assignment of your right to vote your shares. For example, you may issue a proxy to a relative, etc. A creditor who seizes your shares cannot vote your shares because the voting powers have been irrevocably assigned to the proxy holder. This, too, will significantly lessen the stock’s value to the creditor, since the creditor would gain no voting rights in the corporation (and therefore be unable to vote to liquidate the corporation, even if they seized 51% or more of its voting stock). If you are sued, you may exchange voting shares for non-voting shares, which will also be of less value to creditors.

• Dilute your stock ownership. If you own a controlling (>50%) interest in a corporation, dilute your ownership. If and when it becomes necessary, you can have the corporation sell additional shares to other family members or to family controlled entities (trusts, limited partnerships, etc.). This is an issuance of new stock rather than a transfer of stock, and as long as it’s done within normal operating business parameters, such a strategy is not considered under fraudulent transfer law. A creditor who seizes a minority ownership interest in the corporation cannot, of course, control the corporation. As a minority stockholder, the creditor only has the right to vote his or her shares and await whatever dividends may be declared. It is sometimes wise to spread the stock ownership in a family owned corporation between family members so that no one family member owns more than 49% of the voting shares. The bylaws would empower the remaining 51% to control the corporation.