Very strong asset protection requires a few layers. Just like dressing for winter. A good asset protection attorney uses tools ranging from LLCs to FLP and offshore asset protection trusts. One strategy we have discussed a lot is the use of LLCs to shield individuals from risky assets. Risky assets are those that have a potential to create liability for their owners such as: real estate, cars, plans, boats, businesses, etc.
After conducing a full asset inventory and risk assessment, the first step in implementing an asset protection strategy is to place risky assets in separate LLCs. The reason for using separate LLCs is to keep the assets that go bad from infecting other assets. The goal is to compartmentalize risk. Creating a number of different LLCs does cause additional administrative work. To counter this additional burden, some asset protection friendly states have enacted Series LLC statutes.
A series LLC is a structure that allows risky assets to be compartmentalized into sub child series for asset protection, while also reducing the administrative burden that comes with the creation of multiple business entities. The way this works is that each series is compartmentalized, meaning that the assets and liabilities are contained within the Sub-LLC. There are then only one operating agreement that governs the entire structure and only one annual tax filing.
For asset protection purposes, the use of a Series LLC should only be considered within states that have a statute specifically authorizing this type of business entity. Not every state has Series LLC statutes or recognizes the entity. I only would recommend them for clients who live in a Series LLC friendly state and if the asset is located in a series LLC friendly state. Otherwise, there is no guarantee that protection and compartmentalization will be effective or that the structure will be tax efficient. In fact, some states like California have plainly stated that they do not recognize the Series LLC structure and will disregard the compartmentalization feature and will also tax each sub-series as its own LLC subjecting each to the $800 franchise tax.
Use of a Series LLC can have benefits, but only if used in the correct way. Otherwise you just have a false sense of security. Enjoy this recent feature on asset protection from The Wealth Preservation Show. https://www.youtube.com/watch?v=fA00U_souuA
Brian T. Bradley, Esq.
Senior Managing Partner
Bradley Legal Corp.
Asset Protection Law Firm