THINK TWICE BEFORE YOU….
This is another installment of our “Think Twice Before You…” series of blogs, to which we will be adding on an ongoing basis. Each blog is meant to alert clients to certain issues or transactions they may face, and to caution them that there may be consequences if these situations are not dealt with properly. At times in the past, by the time the matter has been brought to our attention, some harm may have already been done. For this reason, we advise clients that if a question arises regarding a transaction involving a trust or underlying entity (such as a partnership or LLC), it will be to their benefit to first confer with legal counsel to make sure there are no unexpected issues or “traps.”
For example, there is the important principal of segregating “hot” assets from “cold” assets. A client’s integrated estate planning (IEP) structure is designed to protect the IEP’s assets from the client’s creditors. But the client should also understand that the trust and the partnership may each have their own creditors. For instance, if the partnership owns a commercial property and a tenant trips and falls, the tenant will sue the owner of the property—the partnership. The lawsuit could put at risk not only the commercial property, but also other partnership assets, such as stocks and bonds.
For this reason, the client should consider segregating “hot” assets, which carry their own potential for creating liabilities, from “cold” assets, which carry little or no potential for creating such liability. Examples of hot assets include residential and commercial real estate, motor vehicles, airplanes, boats, and certain general partner interests. Examples of cold assets include cash, brokerage accounts, stock, limited liability company interests, and limited partner interests. The hot assets could be placed into a separate entity (or entities), such as a limited liability company, which would be owned by the client and the trust in the same 1%/99% manner as the partnership is owned. In our example, if this separate entity were then sued by the trip-and-fall tenant, the only asset at risk would be the commercial property. The cold assets of the partnership would remain protected.
We hope you will look forward to our upcoming “Think Twice Before You….” blogs for other potential “traps” which a client should be aware of. And remember that, to avoid running into unforeseen consequences, please consider conferring with legal counsel before engaging in any activity that involves the IEP structure.
- John R. Garland