While asset protection should be an important objective for all persons in their planning, many persons implement asset protection to address a specific liability concern. In some situations, this specific liability concern relates to a certain litigation or creditor; in these situations, a person may terminate their asset protection structure when the particular case or claim is settled or otherwise resolved. In other situations, this specific liability concern relates to a certain activity, such as being a doctor or real estate developer (or in another “lawsuit risky” profession), or a director or officer of a company; in these situations, a person may terminate their asset protection structure when the person retires from or otherwise discontinues the particular undertaking.

The desire to terminate an asset protection structure is not unreasonable. Most asset protection structures involve multiple entities. These entities generally incur initial formation costs and then annual maintenance costs. Additional costs can arise from the preparation of tax returns for these entities. An asset protection structure also can create complexity from the loss of control over a person’s own assets and the involvement of third parties in managing a person’s own assets. If one believes that there is no longer a need for asset protection, the desire to save costs and reduce complexity can certainly encourage a person to want to terminate their asset protection structure.

The first point to note is that it may be imprudent to terminate an asset protection structure. Even if you believe that you are no longer subject to the specific liability concern that caused you to establish the asset protection structure, in our litigious society, unanticipated liabilities always can arise. An analogy can be made to property insurance. Would you terminate property insurance just because your house was not damaged by hail from a particular storm? The answer should be no – there is always the potential for your house to be damaged by hail from the next storm or any other possible unanticipated adverse circumstance that could damage your house. Similarly, just because you have avoided the specific liability concern that caused you to establish the asset protection structure, it does not mean that you are immune from all other future liabilities.

A second point to note is that as opposed to terminating an asset protection structure, another approach may be to reduce the scope of the asset protection structure. Asset protection structures come in all shapes and sizes. To the extent that your liability concerns are reduced, your need for asset protection is also likely reduced. A reduction in the scope of your asset protection structure can involve the termination of one or possibly multiple entities that comprised your asset protection structure, resulting in a cost savings for you. A reduced asset protection structure also may reduce complexity in your affairs. With a reduced asset protection structure, you still can achieve a certain degree of asset protection from liabilities, without losing all asset protection from any future liabilities if you completely terminated your asset protection structure.

In addition to the two points noted above, there is a third point – the focus of this article – to note concerning the termination of asset protection structures. This point is to consider the possible transfer of your asset protection structure to the next generation.

We all want our children to lead good lives. We want them to have good health, good jobs, and good relationships. Estate planning is largely based on wanting our children to be in a good financial situation. We want to transfer our financial successes – evidenced by our wealth – to them. As part of our children being in a good financial situation, we do not want them to face liabilities that could destroy their financial position. While we may not expressly consider asset protection for our children, transferring an asset protection structure to your children is consistent with the objective of estate planning.

This concept of transferring your asset protection structure to the next generation derives from the view that an established asset protection structure has value. You have made an “investment” in your asset protection structure from the costs you paid to establish and maintain your asset protection structure. If you terminate your asset protection structure, this “investment” has no future value. However, if you transfer your asset protection structure to the next generation, you continue this “investment” to provide value for the next generation. You save your children the legal fee and filing fee costs that they would otherwise need to incur to create their own asset protection structure.

Fraudulent conveyance doctrine

The value here is more than just the cost savings from the use of existing entities. A key limitation on many asset protection strategies is the “fraudulent conveyance” doctrine – the concept that you cannot transfer assets to defraud a creditor. A significant element in the “fraudulent conveyance” doctrine is the timing of an asset transfer relative to a creditor claim. To the extent that transferring assets to a preexisting asset protection structure (perhaps one established a decade or even longer ago) enables the next generation to more easily assert an “earlier” transfer of assets, the transfer of an asset protection structure to the next generation also can provide value by helping to provide a better defense against a creditor’s “fraudulent conveyance” argument.

Transferring an asset protection structure to the next generation involves transferring the ownership, and possibly also the management, of the entities in the asset protection structure to the next generation. With respect to a corporation, you would transfer the stock of the corporation, and possibly also change the directors and the officers of the corporation, to your children. With respect to a limited liability company, you would transfer the membership interests of the limited liability company, and possibly also change the managers and the officers of the limited liability company, to your children. Depending on the specific objectives that you seek to achieve, including whether you want to retain “management control” over the entities in the asset protection structure, you may decide not to transfer management, while still transferring ownership, of the entities in the asset protection structure to your children.

The transfer of an asset protection structure to the next generation can occur on your death or during your lifetime by gift. If the entities being transferred have no assets in them, the transfer can occur without any estate tax liability or gift tax liability considerations. If the entities being transferred have assets in them, the transfer must be evaluated in terms of possible estate tax liability or gift tax liability. It is important to remember that the current lifetime Federal estate tax and gift tax exemption is $15 million per decedent or donor and the current Federal annual gift tax exclusion is $19,000 per donor per donee.

You also want to be certain that the asset protection structure being transferred does not expose the next generation to any liabilities already appurtenant to the asset protection structure. If your asset protection structure is already tainted by liabilities that could be applied to your children, there is no choice but for your children to establish their own “new” asset protection structure.

One type of asset protection entity that may be particularly useful for purposes of the transfer of an asset protection structure is the series limited liability company. With a series limited liability company, your assets are divided and segregated among the different series of the limited liability company. The key asset protection feature of a series limited liability company is that even though it is one entity, the liabilities of one series of the limited liability company are distinct from, and do not extend to, the assets of any other series of the limited liability company. The series limited liability company can be very effective for the transfer of an asset protection structure because of the flexibility it can provide within a single entity. For example, if you have a series limited liability company with series “A”, series “B”, and series “C”, you could possibly transfer ownership of series “B” to one child, transfer ownership of series “C” to a second child, and retain ownership of series “A”. You could have series “A”, series “B”, and series “C” of the series limited liability company each managed by different persons (including you, your children, a third party, or some combination of you, your children, and/or a third party).

As a final point, the reference to the “next generation” in this article does not mean that this concept of transferring an asset protection structure is limited to children transferees. The transfer of an asset protection structure can be beneficial for any person that you desire to achieve asset protection, whether it be children, grandchildren, other family members, or “key employees” (although the transfer to “non-family” members should involve consideration of income tax issues).

If you have any questions concerning the transfer of your asset protection structure to the next generation, please discuss these issues with your advisers.