In our past articles on estate planning, we have primarily discussed the Revocable Trust, which allows your estate to avoid probate but does not protect your estate from creditors. If you are interested in using estate planning in order to shield certain assets from your creditors, two other vehicles may be useful: (1) the Family Limited Partnership; and (2) the Irrevocable Trust.
In our hour of need, let’s call on the Avengers to help make estate planning interesting, which is on par with saving New York from Loki in terms of difficulty. In order to develop the super-soldier serum that would eventually imbue Captain America with his powers, Howard Stark borrowed several million dollars. Although Howard has every intention and expectation of repaying the loan, he would like to make sure that his prized asset, Stark Tower, as well as his savings account, are protected from collection by his creditors in the event of a default. His primary concern is ensuring that these assets are included in Tony’s inheritance.
Family Limited Partnerships
One way that Howard can protect his assets from his creditors is to transfer ownership of Stark Tower and his savings account into a Limited Partnership with Howard as a general partner and his son, Tony, as a limited partner. If Howard does this, his creditors will not be able to access partnership property.
Howard’s creditors’ remedy would be to obtain a charging order requiring that any disbursements from the partnership to Howard be paid directly to the creditors. If a judgment is entered against Howard, Howard can preserve Stark Tower and his savings account by avoiding disbursements to himself. The downside of this strategy is that Howard will be required to observe certain formalities, such as an operating agreement. Howard would also have to give up some interest in the property to Tony, even if it is only a future interest.
Another option for Howard, which can be used either in conjunction with the Family Limited Partnership or independently, is to place Stark Tower and Howard’s savings account in an irrevocable trust. Again, in this scenario, Howard would have to give up some sort of control or future property interest.
This is usually more palatable with respect to real estate than bank accounts.
For example, Howard could give himself the right to live at Stark Tower for a limited number of years, at which point the property reverts to Tony, the beneficiary of the trust. Another option would be to provide the trust with the right to purchase the property at a price equal to the mortgage, which would supersede any creditors’ claims, making the property valueless to creditors. The downside to both of these options is that they would inhibit Howard’s ability to sell the property.
If Howard wishes to protect his bank account through an irrevocable trust, he will be required to make Tony the beneficiary, meaning the funds in the account must be used for Tony’s benefit, not for Howard’s.
Bottom line: Both the Family Limited Partnership and the Irrevocable Trust require you to give up some rights in the property that you wish to shield from creditors. The rule of thumb is that the more control of the property that you give up, the greater the protection these mechanisms provide.
Illinois Law Blog: Learn About Law
O’Flaherty Law is based in Downers Grove, Elmhurst, and Naperville, Illinois. Our team has expertise in many areas of law including but not limited to bankruptcy law, business & corporate representation, civil litigation, criminal defense, estate planning, divorce & family law, immigration; probate, guardianship & elder law; and real estate law. If you have any questions or would like to schedule a free consultation, please e-mail us at firstname.lastname@example.org or call us at (630)324-6666.
Where You Can Read Us
O'Flaherty Law has experience in legal services in the following legal practice areas: estate planning and probate; featuring wills and trusts, powers of attorney, living wills, estate tax avoidance and probate practice; real estate law; featuring commercial and residential sales and leases, foreclosure defense, short sales, REO closings and consent foreclosures, mechanic's liens and landlord and tenant disputes; family law; featuring divorces, child custody, child support, paternity, adoption and orders of protection; criminal law; featuring DUI, traffic and criminal defense; business representation; featuring entity selection, incorporation and s-corp election, bylaws and operating agreements, annual reports, annual meetings of shareholders, employment agreements, handbooks and warning and termination letters, business contracts, independent contractor agreements, trademarks and copyrights, regulation and licensing compliance and dissolution and mergers; business and personal bankruptcy; featuring Chapter 7, Chapter 11 and Chapter 13 cases; litigation; featuring commercial contract and tort law, employment and labor law, personal injury and collections; and immigration law.
Located in Downers Grove, Illinois, O'Flaherty Law serves DuPage County, Will County, Cook County, Kendall County, Kane County and McHenry County in Illinois, as well as the following cities: Wheaton, Naperville, Woodridge, Downers Grove, Darien, Willowbrook, Westmont, Lisle, Oak Brook, Warrenville, Glen Ellyn, Aurora, North Aurora, Batavia, Geneva, St. Charles, Lemont, Joliet, Bolingbrook, Plainfield, Crest Hill, Lake Forest, Lake Bluff, Northbrook, Highland Park and Chicago.
© 2015 by O'Flaherty Law. All rights reserved.