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Protect Your Cash, Stocks, and Bonds with the Right LLC

Roger McClure Oct. 18, 2011

Age of Uncertainty. In an age of uncertainty, where the global market is changing so fast and is so complex and intertwined that even a super computer or a financial genius will get it wrong a lot of the time, you need to have a strong defense of your financial assets.

Corporations for Businesses. Business people are used to using corporations and LLCs to protect themselves when operating a business. What is less common is to use an LLC to protect their cash, stocks, bonds, precious metals and other liquid assets.

Fred Loses His Nest Egg.lostpropertynesteggFred bought a two million dollar home when business was booming and put a million down. Now the lender says that the property is only worth $800,000 and has started foreclosure. The house sells at the foreclosure auction for $500,000 and now Fred still owes the bank $590,000 as the balance on the loan which now includes $90,000 of attorney fees, advertising costs and a trustee commission incurred as a result of the foreclosure. Fred has $800,000 in stocks and bonds and the bank gets a court order to get paid $650,000, up from $590,000 due to $60,000 of bank attorney collection fees, out of the stock and bond accounts of Fred. Fred consults his attorney to ask if there is a way to protect his life savings and the attorney advises him that it is too late because Fred already knew about the pending foreclosure and anything Fred did now may be a fraudulent transfer.

What Should Have Fred Done?decisions Fred could have set up a Virginia or Delaware LLC prior to his financial troubles to own just his cash, stocks, bonds, precious metals and other liquid assets. He would not put his home or business into this LLC. Once the Bank comes after him after the foreclosure, the bank lawyer will ask the Judge to issue an order to take the assets owned by Fred’s LLC to pay the balance owned to the Bank. Fred’s lawyer answers that the Bank can’t take the assets owned by the LLC because the LLC, not Fred, owns the assets and the Bank does not have a judgment against the LLC.

Take Over of LLC. The Bank’s lawyer then says, well, if we can’t get the cash directly in the LLC, we will get it indirectly. Since Fred owns 80% of the membership interests in the LLC, the Bank’s lawyer requests that the Judge order a sale of Fred’s 80% membership interests in the LLC. The Bank plans to buy the 80% membership interests at the court ordered auction of the membership interests at a very reduced price, vote a Bank officer in as the Manager of the LLC and then have the bank appointed Manager dissolve the LLC and distribute all of the LLC assets to the members, 80% of which go to the Bank. Result: the Bank gets paid in full, including the $150,000 of attorney’s fees and costs.

Fred’s Counter Offense. counterofferFred’s lawyer counters that the LLC is a Virginia LLC and that under Virginia law, a charging order is the sole remedy of a creditor of a member of a Virginia LLC. In other words, the Judge is prohibited by Virginia statutory law from exercising the normal powers of a Judge to order the sale of the LLC membership interests to satisfy a judgment against a member. The Bank obtains a charging order that says if the LLC distributes, say $10,000 to Fred, the Bank and not Fred gets the $10,000. The Judge enters the charging order and denies the Bank’s request to sell the membership interests in the LLC of Fred. Fred is the Manager of the LLC and the LLC agreement gives Fred the discretion not to make distributions of assets out of the LLC. Fred tells the Bank there will not be any distributions out of the LLC anytime soon and the Bank cannot force distributions out of the LLC.

Settlement. With this stalemate, the lawyers for Fred and the Bank enter into settlement discussions. They settle on Fred paying $95,000 to the Bank in final settlement of all of Fred’s debt to the Bank. Fred makes a distribution out of the LLC to Fred to settle the debt by paying $95,000. Fred saved himself $500,000 or more and retains most of his nest egg.

Not Corporation or Trust. Could Fred have used a corporation or a trust to provide this protection? No, for the corporation, because corporate shares are the same as any other asset and can be seized and sold by court order. See prior blogs for protection of corporate shares. For trusts, unless it is a special asset protection trust set up under special offshore or certain state statutes providing for a special asset protection trust, a trust set up by Fred does not provide Fred this protection under the self settled trust doctrine. In addition, an LLC set up in a state without specific language that the charging order is the sole remedy may not provide any protection for Fred. See our article on Shaun Olmstead v. Federal Trade Commission in our 2010 blog entitled Asset Protection denied with LLC. Also, Fred has to set up the LLC prior to a creditor coming after him under the fraudulent transfer doctrine. More on these doctrines in subsequent blogs.

Act Now. Don’t wait for financial disaster to strike you before it is too late. Call us for your options for asset protection of your stock and bond portfolio.