Our firm recommends that you consider the formation
of a limited liability company (the FLLC) to centralize ownership,
and isolate and protect your personal assets and activities. The FLLC
is one of the most important techniques in domestic asset protection
and financial planning, and is the cornerstone of any high net worth/sophisticated
estate plan. It is significant because it serves as a fundamental
piece in several financial and business planning areas, including
asset protection, estate planning, and income tax planning.
Managing significant assets properly can be a business in and of
itself. Thus, the FLLC is a business, which ideally involves the
management of a diverse group of assets, such as mutual funds, public
securities, private securities, real property (but typically not
the family’s residence), a vacation home, rental property, and collectibles.
As the value and diversity of the assets in the FLLC increase, so
too does the entity’s business purpose and ultimate effectiveness.
The FLLC would protect such personal assets from liabilities, and
would provide the most powerful domestic financial and tax-planning
vehicle available today.
The FLLC structure that we would recommend would be a Manager-Managed
LLC. The Members under this structure would not participate in the
business, and would have limited liability. The Manager of the entity
would run the daily operations of the business and would also maintain
limited liability. This creates a structure with liability protection
throughout. The Members, which only receive distributions of profits
or losses, would ideally be you and your family. The Manager would
either be an individual or a separate LLC.
Using the FLLC to own personal assets offers a significant layer
of asset protection to protect against future litigation, and also
protects against lawsuits involving other family members. The liability
protection is provided by the statutory provision regarding a charging
order.
A charging order only grants the creditor the right to “step into
the economic shoes” of a member, which essentially provides that,
in the event there are distributions to Members, then, and only
then, will the holder of the charging order receive payment. Since
you will likely maintain control over the Manager, and will be controlling
such distributions, it is unlikely that you would ever make such
distributions as long as the creditor held the charging order. Moreover,
even if distributions are not made to the Members, there is a strong
position that the holder of a charging order may still be subject
to taxes on his or her percentage ownership of Company profits (a
tax which the creditor would have to pay on “phantom income”). Consequently,
a holder of a charging order faced with paying taxes on income he
or she has not received will typically have a strong incentive to
withdraw or settle a claim, and disappear.
The primary tax benefits associated with the FLLC structure are:
it is a “flow-through” tax entity which will distribute K-1 income
rather than W-2, and such income will be taxed only once and will
not be subjected to the various employer taxes;