Asset Protection: Rabbit Plan vs. Lion Plan

This blog discusses the difference between chaos or unstructured asset pools and alternatively establishing highly structured approaches for effective asset protection. Unfortunately, too many rely on dispersion rather than organization. Thus, the art of safeguarding financial resources and assets against unforeseen adversities and volatile market conditions is highly sought after… but regretfully sought when it’s already far too late. It’s the rabbits versus the lions approaches (I.E. Rabbits protect their species through rapid multiplication and wide dispersion while lions have a lower birth rate but ferociously defend the species in discrete spaces.) The conceptual differences are explained below.

Cute but helpless...

The Rabbit Approach:

In essence, an organic, unstructured series of unconnected or interconnected assets can provide a degree of protection simply due to the cost of unraveling such a complicated mess. The issue however is the cost of management alongside the vulnerability of such an environment that relies on its scattered nature rather than proven statutory protection.

Example: Client has a skill set which allows her to train, set up and assist in managing a buy-here, pay-here car dealership. Instead of being paid an up-front fee, Client accepts an equity share of the new company. Over time, Client obtains dozens of equity shares in dozens of companies…some successful, some not. Client provides services and holds equity shares through a series of holding entities or not… some of which are operating at a significant profit and others that are operating at a loss. The obvious scattered nature of this situation would lend itself to asset protection by being simply impossible to track down. The sheer cost of the legal fees to do so would be outlandish and might not be cost effective in relation to the debt.

One of the many issues in a dispersed asset pool would certainly be the lack of control, poor efficiency, and high management costs. Imagine having to file hundreds of tax returns…or indeed the potential liability of forgetting to file tax returns in a timely manner. Who manages the books for hundreds of entities, some of whom are not profitable and cannot even cover the costs of administration? What money is going where and how would the Client even know she was owed a share of the profits? What would the Client’s tax returns look like? And how vulnerable would all those entities be if the Client were to be personally sued?

Safe!

The Lion Approach:

In the alternative, a highly structured asset plan might provide a limited number of “targets” for the potential takers but at the same time can offer maximized legal protection while minimizing the sheer difficulty of managing such a dispersed asset pool.

More sophisticated owners use a structured asset pool that is dispersed where necessary and managed and protected under a single massive umbrella. This sort of arrangement provides economy of scale, actual legal shelter and real asset protection.

Some of the efficiencies of the Lion Approach are:

1.      Discrete Buckets: Not all assets should be lumped together. Rental real estate has certain tax advantages and specific liabilities that wouldn’t go well with investment accounts or a service business. Placing those assets into a specific entity like an LLC or a series LLC is a good way to isolate them from other unrelated assets.

2.      Built-in Legal Protections: Business entities (Partnerships, LLCs, Corporations) have specific legal protections that are part of the structure. Generally, business entities have what’s termed “Top Down” protection so that the owner’s assets are not exposed to the liabilities of the business.

3.      Umbrella Coverage: Placing a series of discrete entities into a single “holding” entity may allow for specific, statutory protection that wouldn’t be available to a dispersed asset pool. Asset Protection trusts and multi-member business structures can be utilized to minimize exposure to external threats.

4.      Management Cost & Economies of Scale: Filing a limited number of tax returns is always preferred over filing hundreds of scattered ones. One management company or trust can provide the necessary bookkeeping and accounting as well as regulatory compliance for the whole structured asset pool rather than duplicating this over and over and over. Similarly, umbrella insurance can be used to cover the entire group of entities thus increasing protection and reducing cost of covering several discrete businesses.

Example: Client has five businesses and individually held assets. Business One is a series of rental properties. Business Two is a rental management company. Business Three is a self-storage company. Business Four is a well-digging company. Business Five is a plumbing company. The rental properties are held in a series LLC. So is the self-storage company. Both are underneath the rental management company, “ABC Rentals, LLC” which operates as a holding company. The well-digging company is structured as a multi-member partnership as is the plumbing company. Both are kept discrete due to certain operational liabilities. The Client’s ownership interest in the plumbing and the well-digging companies are held by and operating company, “Well Plumbed, LLC.” Both LLCs, ABC and Well Plumbed are held in a revocable living trust. Client’s personally owned assets are held in an asset protection trust in a favorable jurisdiction.

Conclusion: It is not wise to default to the Rabbit Approach when the Lion Approach provides so many benefits and “actual” asset protection. I recommend involving competent legal counsel who has a deep understanding of business organizational strategies and asset protection in general.

Curry Andrews, Attorney