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Limited Liability Company – Questions and Answers
Asset Protection Planning! Is  featured on New-Jersey-Lawyers.com

Limited Liability Company – Questions and Answers

Asset Protection Planning

By Michael B Mangini, J.D.

 

 

Question 1: Should I consider using an LLC to protect my assets?

Answer: Whether or not an LLC is right for you depends on what you own, how you own it, your willingness to part with control, and your level of risk. It is beneficial to hold investment assets within an LLC. I would not suggest putting personal use property into an LLC. For example, if you own rental real estate outside of an LLC, e.g. in your name alone, the property and your other assets are open to attack from two directions. First, if a person is injured on the property and the judgment exceeds insurance coverage limits, the plaintiff may seize the real property or your brokerage and bank accounts to satisfy the judgment. Second, if a plaintiff sues you for something totally unrelated to the property and wins, the plaintiff may seize the property to satisfy the judgment. If the property were held in an LLC, the plaintiffs in the two examples above would be limited to what they could seize. In the first example, the plaintiff would be limited to satisfying the judgment out of the value of the rental property; he could not seize your personal assets. In the second example, the plaintiff could not seize the rental property; his only remedy would be a charging order against distributions that the LLC makes to you. If the LLC makes no distributions, the plaintiff gets nothing. The plaintiff cannot seize your membership interest.

Question 2: The LLC looks like a strong tool; are there risks?

Answer: There are always risks. (1) If the plaintiff can prove that the injury was due to your personal negligence, rather than to the negligence of someone you hired, he might sue you directly and get at your personal assets if he wins. This is why it’s usually better to hire a management company, employee, or independent contractor to work on investment property. (2) If you fail to respect the entity, a plaintiff might pierce the veil of protection and seize the asset held within an LLC. Some clients are just unable to see that they and the LLC are two different “persons” under the law. They use the LLC bank account as their own, they treat the property as their own, they fail to obey the terms of the operating agreement, and just generally ignore the LLC. In these cases, why should the plaintiff and judge respect the entity? (3) There is a Colorado Bankruptcy case that ignored a single-member LLC for asset-protection purposes. The judge opined that the statute was intended to protect innocent members from the consequences of a culpable member’s acts; since there was only one member, the culpable one, the judge denied LLC protection. This is why you may want to consider giving an interest in the company to someone else.

Question 3: To whom may I give LLC membership interests?

Answer: You can transfer membership interests to almost anyone or any entity, including your spouse, children, trusts for children, siblings, trusts for charities, friends, other LLCs, partnerships, and C Corporations. For example, let’s assume that you want to transfer a brokerage account into an LLC. You create the LLC and change the ownership of the account. You then create trusts for your children and transfer LLC membership interests into the trusts. The trustee exercises the rights of ownership on behalf of the children. You may manage the company or hire an independent manager. The income and dividends may be reinvested or distributed to you and the trusts for your children. The percentage of income and dividends that the trusts receive depends on the percentage of membership interest you transferred to them.

Question 4: What is a charging order?

Answer: The only remedy a creditor has against a debtor/LLC member is to obtain a charging order entitling the creditor to the debtor’s share of any actual current or liquidating distributions. The right to a charging order replaces any other method of attachment or garnishment otherwise available to the creditor with respect to the debtor/LLC member. Some courts have held that a partnership interest can be sold to satisfy the claims of a creditor when the charging order fails to do so, but the New Jersey LLC statute declares the charging order as the sole remedy.

Question 5: I know that I can form an LLC online by myself. Why do I need a professional advisor such as an attorney?

Answer: True, you can form the company online, but the mere existence of the LLC offers little protection. A professional can draft the Operating Agreement to include the provisions you want and need and can monitor activities that may cancel statutory protection. You need good documents and procedures to benefit from the statutory protection. Further, you may get significantly more protection from an LLC formed in a different state or country. An advisor familiar with the options can help you make the right decision.

Question 6: What is the difference between an LLC and a corporation?

Answer: The sole remedy of a creditor of a debtor/LLC member is the charging order against distributions. The creditor of a debtor/corporation shareholder may attach and gain ownership of the shares, thus giving the creditor significant management rights. For asset-protection purposes, the LLC is a better structure.

Question 7: Where should I form my LLC?

Answer: The jurisdiction of formation depends on a number of variables that include the nature of the asset, your goals, your comfort level, the laws of the various jurisdictions. With the Colorado bankruptcy court case that pierced a single-member LLC, a foreign LLC might be better than a domestic. If you are going to fund the LLC with real property, a local LLC might offer the same benefits as a foreign LLC. If the state where you live permits a creditor to attach your membership interest, you should consider forming the company in another state or country.

Question 8: May I put my personal residence in an LLC?

Answer: You may, but it might not be a good idea. First, you will lose capital-gains tax benefits. Second, if you fail to pay fair-market rent you will probably lose any protection. Third, a judge might look unfavorably on someone who has transferred all assets, including a personal residence, into protected entities, find that you made fraudulent transfers, and disregard the entity.

Question 9: May I use an LLC as a 3^rd-party, asset-protection device?

Answer: Yes. One situation where the LLC might be helpful is when a child for whom you have funded a custodial account is reaching the age of majority (18 or 21). You can invest the custodial account funds in a family LLC into which you also have contributed funds. Your child will be a member; you will be a managing member with decisions over distributions. Thus, your child will not get control over the money at 18 or 21.

Question 10: Will I become personally liable for the liabilities of the LLC?

Answer: No member of an LLC is personally obligated for any debt, obligation or liability of the company, or for any debt, obligation or liability of any other member of the company, by reason of being a member of the LLC. However, if you personally assume liability or guarantee a debt, you will be personally liable. If possible, always sign as member or manager, and clearly acknowledge the entity on all correspondence.

Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax information contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. The information contained in this communication is not legal advice and shall not be considered as such. It is for information purposes only. The use of Limited Liability Companies is case specific. Whether or not this technique is appropriate for any individual depends on a complete analysis of the individual’s assets and liabilities and personal circumstances. Consult knowledgeable professionals before using a Limited Liability Company.

 

Prepared By Michael B Mangini, J.D.
35 Court Street
Freehold, New Jersey 07728

Tel: (732) 409-3209

www.newjerseyestatelaw.com

© 2007 Michael B. Mangini – All Rights Reserved

This article reproduced and published on this website with

Permission from the author Michael B Mangini, J.D.

 

© 2007 Michael B. Mangini – All Rights Reserved

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The following article about Having a Will Prepared Does Not Have to Be Expensive! is featured on New-Jersey-Lawyers.com

The below article has 40 topics. We are posting topics 31-40 today. You can read the entire article on New Jersey Lawyers under Having a Will Prepared Does Not Have to Be Expensive!

By Theodore Sliwinski, Esq.

31. What are the practical limitations of having a will?

Wills aren’t the place to handle certain kinds of property or issues. Wills are a wonderful, simple, affordable way to handle many people’s estate planning needs. However, in many scenario’s much more estate planning must be used to properly serve the client. Here are some of the important limitations of a will;

a. You can’t use your will to leave property you hold in joint tenancy with someone else (or in “tenancy by the entirety” or “with right of survivorship” with your spouse). At your death, your share will automatically belong to the surviving co‑owner. A will provision that leaves your share to another person would have no effect unless all of the co‑owners died simultaneously.

b. You can’t use your will to leave the proceeds of a life insurance policy for which you’ve named a beneficiary.

c. You can’t use your will to leave money in a pension plan, individual retirement account (IRA), 401(k) plan, or other retirement plan. Instead, name the beneficiary on forms provided by the account administrator.

d. You can’t use your will to leave money in a payable‑on‑death bank account. If you want to name a different beneficiary, just fill out a simple form at the bank.

32. When do I need to change my will?

It is important to make sure your will reflects your current wishes and situation. Life constantly changes. Your will should always be tailored to your current family and financial situation. Here are some events that should encourage you toward making a new will and reviewing beneficiary designations that have made for insurance policies, bank accounts, and retirement accounts.

a. You get married. You and your new spouse should create new wills when you get married. In New Jersey, your spouse is entitled to an elective 1/3 share of your estate after you die, unless you have a prenuptial agreement to the contrary.

b. You are unmarried, but have a new partner. Without a will, such as a living trust, your partner will inherit nothing. To avoid this, you and your partner will probably want to make new wills. Different rules apply if you and your partner are registered domestic partners.

c. you get divorced. A final judgment of divorce revokes any gift made by your will to your former spouse. Therefore, you should make a new will after a divorce.

d. You have a new baby. You will want to make a new will to name a personal guardian for the little one. This is the person you want to raise your child in the unlikely event that both you and the other parent become available.

e. You have new stepchildren. Unless you legally adopt stepchildren. They have no right to inherit from you in most situations. If you want to leave them a share of your property, then you should adjust your will.

f. You acquire or dispose of substantial assets, such as a home. If you leave all of your property to one or more people, there is no need to change your will as what you own changes. But if you’ve made specific gifts of property that you no longer own, you’ll want to avoid leaving the intended beneficiaries out in the cold. Likewise, if you obtain new property and you want to leave it to someone specific, you’ll need to change your will to make your wishes clear.

33. Can I prevent my spouse from inheriting my property?

Possibly. A divorce operates as revocation of any bequest made to your former spouse or any appointment of your former spouse as executor, but in all other respects the will is still effective. You can disinherit your spouse in your will. However, there certain laws that exist to protect a spouse if this should occur. New Jersey provides a surviving spouse with a right to take an elective share, which is up to one‑third of certain assets. However, there are several conditions that must be satisfied before a spouse is entitled to receive an elective share. If you and your spouse executed a valid prenuptial agreement waiving the right to an elective share or if grounds for divorce exist at the time of your death, your spouse will not be entitled to an elective share.

Any property that you own jointly with a right of survivorship with your spouse, as well as any life insurance, IRAs, 401(k) plans and similar retirement plans for which you designate your spouse as the beneficiary, will pass to your spouse regardless of what your will says.

34. May I change my will?

Certainly. A will is not an irrevocable legal document. A will may be changed or revoked in its entirety prior to your death provided that you have the mental capacity to change or modify it. To do so, you must either create a new will or execute an amendment, which is known as a codicil. If you want to revoke a prior will, then you should do so by making an express written statement in your new will.

35. How much does it cost to make a will?

The cost will vary according to each person’s individual needs. Unfortunately, many individuals obtain inadequate generic wills when they are looking for a bargain. I provide a basic will package for my customers. I charge a fee of $150 to prepare a basic will. I also charge $50 to prepare a power of attorney, and $50 for a living will. The price for preparing a will becomes more expensive if the distribution plan is more complex, and if any trusts are incorporated into the will. Mr. Sliwinski, Esq. prides himself for preparing all types of wills and other estate plans for an affordable price.

36. Can a will save me money in the long run?

Absolutely. A will can eliminate the requirement of obtaining a bond for your estate. Even for a modest estate the cost of a bond is at least $1,000 per year. Additionally, for a larger estates, a properly drafted will can often reduce federal estate taxes and New Jersey inheritance taxes by establishing trusts and providing directions as to how long a beneficiary must survive you in order to inherit under your will.

37. Can I prepare my own will?

Yes, however many self-made wills are deficient and they can’t be admitted to probate. The bottom line is that many internet company prepared wills are garbage and they are legally insufficient. Moreover, many of the fill in the blank form wills are also garbage and they can’t be admitted to probate. Finally, a self-prepared hand written “holographic” wills can only be admitted to probate after a costly time consuming formal Probate Court hearing.

38. What effect does a will have on real estate that is owned jointly by a husband and a wife?

Any real estate that is owned jointly by a husband and wife in the form of ownership legally known as “tenancy by the entirety” is not controlled by the will of the spouse who dies first. Therefore, the surviving spouse will become the sole owner of the home if he has rights of survivorship, regardless of what the will may provide.

39. Do all states have the same probate laws?

No, although New Jersey is one of several states to enact the Uniform Probate Code, most states have their own probate laws. Therefore, is a good idea to have your will reviewed when you move to another state.

40. Where is my will filed after I die?

When a person dies leaving assets in his name alone or in joint names with another person other than a spouse, it will be necessary to present the will to the County Surrogate for probate. The will is presented to the County Surrogate in the county wherein the decedent lived at the time of death.

The executor will need to present the original will, a certified copy of the death certificate, and a list of names and addresses of the closest next of kin to the County Surrogate. The legal papers are then prepared by the court and signed by the executor. The legal review of the documents by the surrogate is the probate of the will. If all of the requirements are met, the will is then admitted to probate and the certificates are issued to the executor. These certificates allow the executor to execute documents formerly done by the decedent such as transfer automobiles, bank accounts, investment accounts, etc.

The original will is retained and filed by the County Surrogate. The will becomes a public record and is listed in the general index.

Written by Theodore Sliwinski, Esq.

http://sliwinski.lawoffice.com/

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