separate liability, such that a huge legal problem for either of you doesn’t automatically mean that both of you have that legal problem. For example: You own shares of XYZ Incorporated which, un- fortunately, is faced with a huge lawsuit. Since you own a portion of XYZ, are you obligated to hire attorneys and help to fight that lawsuit? No, you are not, because XYZ is viewed in the law as a distinct legal “person” with its own legal liabilities that are distinct from the liabilities of its owners. But consider the opposite problem: You own shares of XYZ Incorporated, but this time it is you (not XYZ) who loses a lawsuit. Since the judgment entitles your opponent to take your assets to satisfy that judgment, then it is entirely possible that your shares of XYZ stock (along with any of your other assets) could end up as the property of your opponent. The protection provided by legal entities is strong, but not abso- lute. They have a definite role in a strong asset protection plan, but as you can see, the protection they provide is unidirectional.
grandparents, any legal problems faced by the grandchild will not extend to the money being held for him by his grandparents… …And that is the essence of a trust. In that case, the grand- parents serve as the “trustee” because they are in control of the money. The grandchild serves as “beneficiary,” because the money is being used for his benefit. HOWTRUSTS AND ENTITIESWORK TOGETHER FOR YOUR SAFETY If you have assets to protect, the combination of a trust and one or more legal entities may be a great way to provide a very high degree of confidence for you in the event of legal problems. A com- mon basic strategy works like this: First, hire an attorney and establish a well-drafted trust. You’ll want to work with an attorney who has specific and sub- stantial experience in trust law. Third, if you want to run a business or make investments, set up the appropriate business entity so that it is owned by the trust rather than by you, and operate entirely through that entity rather than through any entity you directly own. By transferring your assets into a trust and by using a business entity to contain your investments or business activities, your assets are protected from each other and from any legal liability you might face. HOWTO GET STARTED Asset protection is truly important for real estate investors. Further- more, asset protection comes with a unique and compelling caveat: If youwait until after you’re facing legal problems to set up an asset pro- tection plan, you’ll soon find that your plan is disregarded by the courts. That’s why it’s important to study, understand and implement a good asset protection plan – under the guidance of an experienced attorney – right now. When you do so, your assets will be protect- ed, and you’ll be able to rest easy, knowing there’s a legal fortress supporting your family’s financial security. • Second, with the guidance of your attorney, you “contribute” your assets to your trust. This has the effect of removing legal ownership of your assets from you and placing that ownership with the trust.
You’re usually protected from the obligations of any entities that you own, but your ownership of those entities is still entirely at risk in the event you face personal legal obligations. The question becomes: How could you have faced the same situation – including the loss of the lawsuit – without the risk of losing your assets?
THE MOST POWERFUL ASSET PROTECTION TOOL OF THEMALL… Owning an asset means that asset can be taken from you. The ideal scenario is not to own assets, but merely to benefit from them. That capability is precisely what is offered by the most pow- erful of all asset protection tools, the “Trust.” Unlike corporations, partnerships and LLC’s, trusts are not a legal en- tity or a separate legal person. A trust is not a business. A trust is simply an agreement whereby one party owns an asset in their own name, but they agree to pass the benefits of those assets on to someone else. A common but informal example is the grandparent who has set aside a sum of money to be used for the education and person- al needs of a grandchild who is entering college. The grandparent could directly gift the money to the grandchild, but rather than doing that – and risking the inappropriate spending of the money by the grandchild – the grandparent chooses instead to maintain control of the money and distribute it as suitable needs arise. Inadvertently, the grandparent has given another wonderful benefit to the grandchild: Legal safety. If the grandchild, who is now legally an adult, finds himself in a car wreck or in other legal jeopardy, any assets owned by the grandchild would be at risk. But because the grandchild’s money is still legally owned by the
Bryan Ellis is the CEO of Self-Directed Investor Society and one of Amer- ica’s leading independent experts on self-directed retirement accounts. For more information about using inherited Roth IRA’s to build your financial legacy, see https:/ SelfDirected.org/legacy.
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