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This page contains a single entry by lsaret published on May 29, 2009 6:55 PM.

The Estate Analyst: "The Million Dollar Estate" was the previous entry in this blog.

Successful Retirement Planning depends on Asset LOCATION is the next entry in this blog.

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The Estate Analyst: "LLCs, Bankruptcy, Trusts"

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lsaret
on May 29, 2009 6:55 PM | | Comments (0) | TrackBacks (0)
By Robert Moshman

The rise of the LLC has democratized the formation of businesses for liability protection and has affected the dynamics of how wealth is shifted in many ways.

The limited liability company did not catch on in the United States until the 1990s. Wyoming was the first state to permit LLCs in 1977, Florida followed suit in 1982, and by 1996, all 50 states were on board. By the year 2000, LLCs made up 5% of all businesses and in some states, 10%. In Connecticut, more than 20,000 LLCs are now being formed annually. Many states make it possible to set up LLCs online for fees of about $50. Most new business formations are LLCs.

LLCs and FLPs have been designed in recent years as wealth-shifting vehicles because of their transfer tax properties of discounting valuation of partnership shares. In addition, numerous one-person LLCs are formed to isolate liability of individuals or protect specific assets.

Meanwhile, despite tougher rules, the number of American bankruptcies rose by 62% in 2008. Under the 2005 bankruptcy reform it became more difficult to qualify for a Chapter 7 "fresh start" bankruptcy in which assets are liquidated and debts are cancelled. More individuals are directed into Chapter 13 bankruptcies in which a five-year repayment plan applies.

As a result, LLCs should be sure operating agreements protect solvent members from another member's bankruptcy if possible. Some state laws limit creditors to charging orders. For single-member LLCs, however, the LLC will be exposed to the member's personal bankruptcy liability.

An alternative is the irrevocable living trust. Set up a trust for others during good times (without fraudulent intent) and those funds remain secure in bad times. As the Girl Scouts say, make new friends but keep the old; the former is silver, the latter is gold.

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