Asset Protection Estate Planning

Historically, asset protection estate planning has been associated with individuals who due to their professional activities, financial status, or public visibility face heightened financial risk. A great portion of that risk can be mitigated through effective asset protection planning. At its core, asset protection is about creating a legal barrier between your assets and potential claimants.

Today, Texas asset protection is on the minds of a lot of people. We hear daily about people from all walks of life and in different stages of their lives becoming millionaires seemingly overnight. Naturally, they want to protect their new-built wealth. Many of them are flocking to Texas because of its longstanding creditor protection laws and low tax structure. But, if you already live in Texas, you’re ahead on the path to protecting your assets – no matter how large your estate.

It’s important to understand from the outset that asset protection is not about hiding assets, evading responsibilities, or trying bypass existing laws. In almost all cases, those activities are considered fraudulent conduct that carry severe penalties – and no practicing lawyer wants to be party to that. Asset protection in Texas is about gathering multiple legal tools under one umbrella to legally safeguard a person’s or family’s wealth against unforeseen claims.

Texas asset protection varies significantly in complexity, from simple exemption planning to the creation of sophisticated structures like trusts and business entities. A basic part of an asset protection plan is comprehensive insurance coverage. This includes professional liability insurance, such as malpractice insurance for doctors, as well as personal liability insurance, homeowners’ insurance, and umbrella policies. These insurances provide the first line of defense against claims, offering a payout to satisfy potential liabilities without the need to tap into personal or business assets.

Beyond insurance, statutory exemptions offer another layer of protection. Certain assets like retirement accounts and homesteads are protected under Texas state law. Texas is recognized as a debtor-friendly environment that offers substantial exemptions from creditor claims. Notably, the full value of an individual’s claimed homestead is shielded from a creditor, irrespective of the property’s value. In Texas, retirement savings accounts like IRAs and 401(k) plans enjoy protection against creditor actions. Uniquely, Texas extends these protections to cover even inherited retirement accounts.

In Texas, when insurance and statutory exemptions together cannot provide sufficient asset protection, we add in legal devices such as irrevocable trusts, limited liability companies, series limited liability companies, and family limited partnerships. These entities act has protected structures that hold the ownership of your assets, thereby separating the assets from you, individually. The mechanisms of these add-ins make it very challenging for your creditors to directly seize your assets.

A Limited Liability Company (LLC) is a popular vehicle used by Texas business owners and property investors to protect their assets. A LLC is a business entity regulated by the state, blending the favorable attributes of corporations and partnerships. It protects its owners – called members — from personal liability for the debts and obligations of the business.

Texas limited liability companies can adopt a single-member format, where the company is owned by a single individual.  Or, they can adopt a multi-member structure, where the ownership is among multiple individuals. In situations where a member is subjected to legal action for issues unrelated to activities of the LLC, creditors generally cannot seize the member’s ownership stake in the LLC. At most, creditors might obtain what’s called a “charging order,” though even it presents creditor limitations.

A charging order entitles a creditor to seize any LLC profits that are distributed to the LLC member who owes them money. However, it does not allow the creditor to interfere with the management of the LLC or force the company to sell off assets to satisfy the member’s personal debt. This limitation greatly restricts a creditor’s ability to access cash from the order, unless the company makes profit distributions to its member(s).

Other benefits of LLCs include tax advantages, operational flexibility, perpetual existence, and enhanced credibility.

The Texas Series Limited Liability Company has gained popularity — particularly among real estate investors and landlords — as a highly favored business-entity structure. This setup allows for the creation of multiple segregated entities that exist under one umbrella, offering the advantages of creating and operating multiple limited liability companies through a single state registration process.

In simple terms, the “umbrella” is known as the “Series LLC,” also referred to as the “parent” or “mother” LLC.  Each of the multiple segregated entities is called a “Series” – or a protected series or a cell.

This structure is similar to a large corporation with various subsidiaries, yet it maintains the simplicity and adaptability of a single, conventional limited liability company. Each protected series mirrors an independent LLC in that it can do almost anything a LLC can do, while also insulating that particular series’ assets from the liabilities of the parent Series LLC and the other protected series.

In summary, a Series LLC provides a structure that allows its members to keep multiple assets separate one from another while still operating under the framework or structure of a conventional single LLC. The primary benefit of a Series LLC is its ability to compartmentalize liability by using multiple series or cells while forming and maintaining only a single state-registered entity — the Series LLC. For this reason, a Series LLC is often used as an alternative to a multiple LLC structure.

Trusts are commonly used in estate planning and asset protection to manage wealth, bypass probate, and insulate assets from excessive taxation. They distribute assets to a beneficiary per a trust agreement.

Asset protection trusts uniquely aim to limit control over assets and shield them from creditors and legal actions. A Texas Asset Protection Trust serves to safeguard various assets, including cash, real estate, business interests, personal property, and other valuables. Texas LLCs and Texas Series LLCs are often used in conjunction with Texas trusts to ensure the most comprehensive strategy in meeting these goals.

Like all trusts, asset protection trusts rely on three key role players, all of whom are named in the trust agreement:

• the Grantor: the individual who establishes the trust. A grantor is also known as the trustor or settlor.
• the Trustee: the party managing the trust’s assets. There can be one or more trustees.
• the Beneficiary: the individual or entity that ultimately benefit from the assets held in the trust.

Contrasted against outright property ownership, trust ownership is rooted in three functionalities:

• the creation by agreement of asset separation;
• the management of assets by a party other than the owner;
• the provision of assets to benefit a third party. Once assets are transferred by the grantor to a trust, they belong to the trust and are managed by the trustee for the beneficiary’s advantage.

Almost every type of asset protection trust is fundamentally an irrevocable trust – that is, a trust that cannot be easily changed or dissolved once they are created. This feature contributes to the reliability and foreseeability in the management and allocation of assets.

A spendthrift irrevocable trust is a commonly used asset protection trust device that derives its protective strength from a spendthrift provision – a clause within the trust agreement that restricts the transferability of the beneficiary’s interest and limits creditors’ ability to reach the assets within the trust. In Texas, spendthrift trusts are governed by the Texas Property Code, which explicitly recognizes and provides for the creation of spendthrift provisions within trusts.

Asset protection planning is a sophisticated and multifaceted approach to safeguarding your assets. It integrates insurance, legal exemptions, and the strategic use of legal entities and trusts to create a robust defense against potential claims and creditors. The success of asset protection planning lies in its preparation and execution, requiring an understanding of the law and a commitment to ethical practices. By employing a comprehensive asset protection strategy, individuals and businesses can secure their assets and ensure their preservation for the future.

An attorney at Reagan Moore can describe in detail our approach to Asset Protection Estate Planning, and how we can create a plan for you or someone you know. Our Texas-based, fully-virtual law firm offers premium estate planning services in all 254 Texas counties. Our unique business model is built to deliver excellent, personalized service to every client at reasonable flat fees. You can count on our experienced lawyers to listen first, then present you options. Let’s collaborate and design the ideal plan for you.