Asset Protect Trusts vs. Family Limited Liability Companies

Occasionally, people who are interested in asset protection ask me what is more appropriate, a trust or some sort of FLC or FLP. Here is my response:

An asset protection trust is more secure than an FLC, but it is also more costly to maintain (high annual fees for an independent trustee) and you give up more control. The more money you have and the more at risk you are for a lawsuit, the more you want to set up a trust. For asset protection trusts to work properly, you must give up almost all decision making power over the assets (to a trusted advisor), and you will become, at best, a discretionary beneficiary of such trust.

A single person FLC does not offer much protection, but certainly some. A two person FLC without an operating agreement offers decent protection from any lawsuit arising out of assets in the FLC, but little protection for misdeeds done outside the FLC. With an operating agreement limiting distributions, you get much more protection and that is why there is more of a setup cost. This structure is good for people who really don’t want to part with their assets and/or think they will need it in the future. These receive more protection over time as the Grantor transfers shares of this down to issue (usually at a discount) because of the lack of marketability and lack of control.

There are many types of Asset Protection Trusts. Inter vivos ones (trusts set up during the Grantor’s life) are invariably more costly than one’s set up on death. Something as simple as a traditional ILIT can make a great Asset Protection Trust, especially if funded with Whole Life Insurance. Self Settled Asset Protection Trusts (where the Grantor is also a beneficiary) are available in a few jurisdictions such as Delaware, Alaska, Nevada and New Hampshire. These are high end domestic asset protection trusts. For even greater protection, we can go offshore.

So, basically, it comes back to what you, the client, is trying to accomplish.