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Asset Protection Lawyer: The New Asset Protection Strategy in Divorce Cases

Asset Protection Lawyer

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These potential scenarios should concern any entrepreneur or investor: You get sued personally and lose; the judgment creditor (the entity that won the suit and was awarded a judgment against you) decides to go after your business and investment assets. Or you have a retail store plus several real estate investments; you get sued for something related to the store and the judgment creditor decides to attach your real estate. You can cry, "Unfair!" all day long and it won't matter if you haven't taken the appropriate asset protection steps.

An asset protection tool you need to understand is the charging order. By definition, a charging order is an order issued by a court to a judgment creditor which essentially compels an entity of which the debtor is a partner or member to direct to the creditor until the judgment is satisfied any distributions that would otherwise have been made to the debtor (from Asset Protection: Concepts & Strategies for Protecting Your Wealth by Jay Adkisson and Christopher M. Riser, McGraw-Hill, 2004).

What this means is that if you have an interest in a Charging Order Protected Entity (COPE) [entities for which creditors are limited to using charging orders as remedies in collecting debt, such as a Limited Partnership (LP), a Limited Liability Company (LLC), and certain others] and a creditor obtains a charging order, the entity is ordered to pay the creditor any money that would have gone to you until the judgment is paid in full. In most states, the creditor has no rights with respect to the ownership or management of the entity and cannot force the entity to make a distribution. The idea is to balance the rights of creditors with those of the non-debtor partners.

Charging orders do not come into play with assets such as stock in a corporation or personal property. But in an entity such as an LLC, legislators have taken steps to prevent creditors from attaching partnership or membership interests and essentially becoming partners or members themselves because such a change in ownership could disrupt the operations of the entity. Where you are not protected by state law, discuss this issue with your attorney because you may be able to create a comparable level of protection through your operating agreement.

How you are protected

As long as the creditor has the charging order, the LLC can simply not make any distributions and the creditor should not receive any money. For example, let's say a visitor to your home slipped on the sidewalk, sued you, and won. As a judgment creditor, he decides to go after all of your assets and gets a charging order against the LLC that owns your real estate investments. He typically can't collect anything until the LLC makes a distribution, and you and the other members of the LLC are perfectly within your rights to decide to not make any distributions for as long as you like. Because of this, creditors with charging orders are often willing to negotiate a settlement to get at least a portion of their money and be done with the situation.

Another issue that often prompts judgment creditors to settle charging orders quickly is the potential for tax liability. If the creditor is entitled to the distribution when it is made, he may also be obligated to pay the taxes. It's possible for the members of the LLC to issue a K-1, which is the tax form used to report a member's share of an LLC's income, potentially making the creditor liable for taxes on profits even though he hasn't received any money.

As of January 2007, there were no known cases where the IRS has held a judgment creditor holding a charging order liable for taxes--but nor are there any cases where the IRS has specifically relieved a judgment creditor of such liability. Until case law becomes definitive on the issue, creditors may be reluctant to take a chance that they could be held liable for taxes on profits they haven't received and may never receive.

The protection offered by charging orders may be circumvented in a number of ways, depending on the state in which the entity operates and your individual circumstances.

Be aware that simply forming a partnership or LLC is not going to automatically protect your assets. Charging order protected entities are some of the strongest and most acceptable asset protection tools available, but to be effective, they must be properly structured and carefully drafted according to your particular requirements and the laws of your state.

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Pleasant Grove Utah Co. UT trust and estate attorney

Asset Protection Attorney: Asset Protection and Charging Orders - What They Are - How They Work

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An asset protection trust offers a perfect solution for holding certain assets (life insurance policies, cash investments, real property, etc) for a specific beneficiary, which can be a group or a single person. There are several different advantages to transferring the personal belongings into a trust. Here are several of the key advantages that might be worth considering:

Protection from fees related to care homes - If an elderly relative needs to go into a long-term residential home, it is often the case that the associated costs will need to be personally met. A common way for the local authorities to receive funds for the long-term care is to essentially inherit the assets, with your main asset relating to the home.

By taking the action at an early stage that is well ahead of requiring any potential care assistant, you are able to protect the home and make certain the full benefit of the property is passed on to the chosen family members.

A highly effective solution for solving matters relating to inheritance - An asset protection trust can make it easier to transfer the belongings in the event of death (due to no transfer of ownership), and makes sure the assets are given to the persons identified at the time of writing the will. If the family circumstances are quiet involved where step-children might feature or where a marriage has broken down, you will likely find that using a trust can make the process go that much smoothly.

Helps to protect the inheritance from creditors - In a situation where a beneficiary of a Will is expensive financial difficulties with debts, any money that is automatically transfer via the information given in a Will could be seized from them by the creditors seeking to recover outstanding debts. But, since any assets transferred to a trust will remain part of the trust even after death, they aren't collectible by the creditors and will remain the full property of the beneficiaries.

Making certain those in need are given the right help - A further quality aspect to relying on the asset protection trust companies is to help those beneficiaries that might not be able to manage on their own. Whether this might relate to someone who often makes poor decisions or physically impaired, a trust is able to give specific guidance on how the benefit is passed to an individual to make certain they are cared for and provided long-term security.

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