In this article, we discuss how the location of particular assets can affect the selection of a jurisdiction in which to form an entity for asset protection purposes.
Our firm was recently asked to review advice that had been given by a group of six or seven speakers who hold themselves out as a “Society” of experts on asset protection planning. Their presentation had been given at a conference of construction contractors. One speaker after another stood up before the audience and made very bold, confident pronouncements, such as:
- Put non-business assets in an Alaska limited partnership; and
- Put your real estate in a Wyoming LLC.
The difficulty with such pronouncements, especially in the field of asset protection planning, is that such canned advice is practically worthless in most instances. If you put your New Jersey real estate in a Wyoming LLC, will a New Jersey judge agree to bound by Wyoming law? If you form an Alaska limited partnership, do you know an Alaskan litigation attorney you can call to defend the structure? The advice from these speakers reminds me of thread in a sweater… tug at it, and eventually the sweater comes undone.
What You Need to Know About Out-of-State Business Entities
We use business entities all the time in asset protection planning. (Take a look at our Planning Tools page for a thorough list of both domestic and international tools that we consider in asset protection planning.) However, business entities themselves are not an appropriate solution for every asset, and certain collateral considerations must be taken into account when using an out-of-state business entity.
Let’s consider Alaska and its limited partnership law. Alaska made a name for itself with one of the first domestic asset protection trust laws in the United States. It did not last long: The Alaska Supreme Court ultimately ruled that the State of Alaska cannot exercise exclusive jurisdiction over its asset protection trusts. Toni 1 Trust v. Wacker.[1] The state’s highest court relied on an earlier U.S. Supreme Court ruling, Tennessee Coal, Iron, & R.R. Co. v. George,[2] to conclude that Alaska’s domestic asset protection trust law must yield to an out-of-state fraudulent transfer judgment.[3]
What does Alaska’s law on domestic asset protection trusts have to bear on limited partnership law? The point is that there is a limit to the effectiveness of state law in shielding assets from creditors. Alaska’s limited partnership law is not particularly advantageous over many other states’ limited partnership laws. Furthermore, if your limited partnership becomes the subject of litigation in a state other than Alaska, you are more likely to find a qualified lawyer experienced in defending the structure from creditors. You do not need to go as far as Alaska to find strong, protective limited partnership law.
When In Rome, Do As the Romans Do
What about the idea of placing real estate assets into a Wyoming LLC? Let me ask you this: Is the real estate physically located in Wyoming? If not, then let me ask you a follow-up question: Will the courts in your state be willing to follow Wyoming LLC law in a dispute centered around the ownership of the real estate?
We recommend LLCs, in part, because of the express limitation on creditors remedies found in many states’ LLC laws. A number of states, including Wyoming, provide in their LLC statutes that the charging order against a member’s interest in an LLC is the exclusive remedy for a creditor of that member; the creditor cannot foreclose on the member’s LLC interest or invade the LLC to reach its property.
There is a fundamental caveat, however: Many states do not follow or enforce the LLC laws of another state. In fact, in some states that expressly limit creditor remedies against LLC members, courts have nevertheless ruled that an out-of-state LLC is not entitled to similar protection.
Utilizing an out-of-state LLC, such as a Wyoming LLC, to hold real estate may yield a worse outcome than placing the real estate in an LLC organized under the laws of your home state. We love Wyoming LLCs, and a member of our staff was a principal proponent of the most recent revisions to Wyoming LLC law. (He is also the author of the most widely published treatise on Wyoming LLC law.) In fact, we use Wyoming LLC law for a variety of asset protection purposes. However, we would never recommend placing non-Wyoming real estate directly into a Wyoming LLC because:
- There is no assurance Wyoming LLC law would be followed by a court in the state where the real estate is located; and
- Courts in that state might determine that members of the LLC are not entitled to charging order protection.
Conclusion
We enjoy speaking at conferences. They present a great opportunity to meet a lot of people and field a wide variety of questions. However, not everyone who speaks at a conference is qualified to render advice on asset protection. This “Society” provides an excellent example of why you need an asset protection lawyer – and not a “Society” of non-lawyer panel speakers – to advise you on asset protection planning.
Speak with the Speiser Law Firm about setting up an asset protection plan.
To learn more about how to you protect your assets, schedule a free consultation.
[1] 413 P.3d 1199 (Alaska 2018). As the Alaska Supreme Court noted, the Delaware Chancery Court reached a similar conclusion in respect of Delaware asset protection trusts. Id. at n. 36, citing IMO Daniel Kloiber Dynasty Trust, 98 A.3d 924 (Del. Ch. 2014).
[2] 233 U.S. 354 (1914).
[3] Toni 1 Trust, 413 P.3d at 1203.