Conventional wisdom dictates doing business in the form of a corporation or limited liability company. This provides shareholders and members in Florida corporations and limited liability companies with individual liability protection against the debts and liabilities of the business entity.
This arrangement still leaves open to attack, from judgment creditors of the individual, that person’s stock or membership interest. Let’s say there is a large deficiency judgment against a borrower in connection with their home or vacation real estate. In such case, the entire 100% stock ownership a person has in his business is subject attachment by a plaintiff who will then own the business.
Individual judgments can arise in any number of ways including taking corporate action that is outside the scope of permissible corporate purposes. You can see that it may not be enough to create a corporation. You should think about protecting not only your business, but also your assets including the stock you own in your business.
You can use separate entities to hold assets and lease assets back to the operating entity. You can also use a separate entity to hold intellectual property and license it back to the operating entity. This separates assets owned by your business entity into companies that are not actively engaged in activities that could lead to corporate liability.
To protect your stock interests more directly, you can also use trusts. These trusts will typically be either Discretionary Trusts or Spendthrift Trusts and will be Irrevocable Trusts.
Spendthrift Trusts expressly provide that a beneficiary’s interest may not be alienated or attached by a creditor. A Discretionary Trust is arguably even more powerful as against creditors because the beneficiary’s interest is tenuous and has at best speculative value since it is subject to the discretion of the trustee.
When looking at your trust needs, consider trusts containing both discretionary and spendthrift provisions. The following will give you an example of trust language for each which you should discuss with your business lawyer, estate planning attorney, and asset protection attorney. Note, there are estate planning issues to consider and some of this language may have gift tax consequences and so care must be taken.
Spendthrift Trust Provision
Neither the income nor the principal of the trust property shall be assigned, anticipated, or alienated in any manner by any beneficiary, nor shall it be subject to attachment, bankruptcy proceedings, or any other legal process, or to the interference or control of creditors or others.
Discretionary Trust Provision
Our Trustee shall hold and administer the Trust for our descendants upon the following terms:
Our Trustee may distribute to any one or more of our descendants as much of the net income and principal of the Trust as such Trustee may determine advisable for any purpose. If the Trustee is an Interested Trustee, [he shall distribute to any one or more of our descendants as much of the income and principal of the Trust as our Trustee determines is necessary or advisable for their health, education, maintenance, and support.] OR [no discretionary distributions can be made.]
Discretionary Standard Provision
My Trustee may act in his sole and absolute discretion.