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Asset Protection Strategies for Individuals and Businesses in Texas through Trusts




Protecting Personal and Business Assets in Texas involves implementing a range of legal strategies to minimize the risks and shield wealth from common and potential risks and threats. Known as a safe haven for businesses, Texas laws provide a substantial amount of protection for certain types of assets.  To see an overview of asset protection, click here. 


In this article, we will explore simple strategies an individual and organization can use to provide a layer of security to their assets and peace of mind to individuals and business entities:


Business Protection Strategies


Creating Separate Entities


Creating a separate entity from your current business for specific purposes relating to a new line of business is one type of asset protection strategy. Common example is the creation of a Limited Liability Company (LLC). Business entities such as an LLC shield owners from personally liable to the creditors. Generally, only the LLC and its assets can be accountable. 


There, the ideal business structure consists of two separate entities, namely: Operating and Holding. The operating LLC does not own any vulnerable assets and the Holding LLC actually owns the business’s assets or shares. The former conducts all the business activities and thus shoulders all the risk of losses. But in reality, there is no liability incurred because there is little to no vulnerable assets to begin with. And the Holding company cannot be held liable for the losses incurred by the Operating LLC. 


Limited Liability Companies


A Limited Liability Company (LLC) provides significant asset protection advantages. In a corporation, a creditor can gain control over a corporation through the stocks. Stocks are intangible assets which can be attached or subject to garnishment to satisfy a judgment order against the owner of the stocks. This scenario does not apply in an LLC. An interest against the member of an LLC is protected through “Charging Order Protection.” Once the LLC distributes interest to the members, the creditor can only take said interest but does not gain voting control over the LLC. Hence, the entire LLC will not be put in danger.


Insurance


Insurance is the first line of defense against creditors’ lien and seizures. Albeit limited, depending on the type of insurance and what it covers, insurance is another type of asset protection. It is thus important to purchase the right kinds and amount of liability insurance. In addition, businesses should consider purchasing an Umbrella Policy as an insurance safety net. Umbrella policy will provide additional coverage. Speak with an insurance agent or broker to learn more about your insurance options. Being under-insured could greatly affect the financial status of the company. Slaim against the business can be greatly reduced by having the right coverages in place. Additionally, being under-insured, businesses will be exposed to liability and may be forced to pay the claims using company money and assets in order to satisfy judgments or settlement amounts, the attorney’s fees, and other expenses.


Combine Business Protection and Estate Planning


Asset protection plan should always be coordinated with the estate plan. By combining these plans, a cohesive and comprehensive approach will be adopted which addresses the unique challenges and opportunities associated with the business. Primarily aimed to safeguard wealth, it can also ensure smooth transition for future generations when a business leader will be incapacitated, dies, or retires.


Personal Protection Strategies


Maximize exemptions


It is settled that certain personal properties are exempted from being subjected to garnishment and seizure. Cash is non-exempt but life insurance and annuity are. To maximize these exemptions, your cash can be used to purchase a cash value life insurance policy or annuity or invest in your retirement account. You can also make annual gifts of money to your children by contributing to their college funds, which are exempt properties.


Transferring property out your name


Transferring ownership of certain properties under your name and into another like your spouse or children is another way of protecting wealth. However, under the Section 4(a)(1) of Uniform Fraudulent Transfer Act, if transfer is made with the intent to hinder, delay or defraud any creditor, it will be considered a Fraudulent Conveyance which creditors can void. Another method is to transfer the property to asset protection irrevocable trust.


Make a pre-nuptial/ post-nuptial agreement


The State of Texas is a community property state amongst married couples. This means that whatever the married couple earns, each has an equal undivided interest. Complications arise with community property commingled with separate properties, thus making it harder to distinguish. Tracing back where the funds originally started from can help figure out whether it is community property or separate property. And in the event that couples decide to divorce, it could be challenging and tiresome. One way to avoid these issues is through a legally binding nuptial agreement. This agreement will ensure that each has separate properties, how to manage them, define the terms of marriage, and separation among others. 


Transferring Assets into Irrevocable Trusts


Asset Protection Trust

An Asset Protection Trust is a form of Irrevocable Trust. There are two types of Asset Protection Trust, namely: Domestic Asset Protection Trust (DAPT) and Offshore Asset Protection Trust (OAPT). 


Under DAPT, one can be the grantor of trust and at the same time the permissible beneficiary of the trust. In this set-up, the trust maker, grantor or trustor can direct the trustee to use the trust assets to purchase items for the grantor or make payments on his behalf. In addition, a DAPT is protected by Texas law, thus claims against the trust cannot be made and the grantor cannot make any changes to the trust. Meanwhile, in OAPT, when your assets are in an offshore jurisdiction, it will be subjected to their rules and regulations giving creditors difficulties in their claims. 


Qualified Terminable Interest Property Trust


This instrument allows the grantor to provide for a surviving spouse and maintain control over how the property will be distributed once a surviving spouse dies. This is typically used by individuals who have children from another marriage. It protects the property under the first marriage and is readily available to the children under that marriage. One of the benefits is it avoids estate taxes. 


Dynasty Trust or Generation-Skipping Trusts


In this type of trust, it allows assets that one transfers to the trust to stay in the family for decades and requires that the property passes to the grandchildren protected from lawsuits, divorce and bankruptcy. Similar to QTIPT, it can also be a way to estate taxes. 


Irrevocable Income-Only Trust 


This trust protects the asset from being sold and simultaneously the income is used to pay for nursing homes and other long term care expenses so that the assets can be transferred to the beneficiaries. Here, the grantor retains the right to any income the trust generates. 


In summary, the use of asset protection strategies depends on various factors which will determine the effectiveness thereof. Thus, it should be tailored based on the needs and circumstances of an individual and business organization. Consulting a Business or Estate Planning Attorney is crucial to minimize the risks and shield wealth from common and potential risks and threats. At Texas Real Estate and Business Law Firm, PPLC, our attorneys are here to help and guide you. Call us!


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