Donald Field's Portrait

Donald L. Field, Jr.

Attorney at Law

601 Montgomery Street, Suite 1088
San Francisco, California 94111
(415) 544-9974

Offering planning, implementation, advice and representation of taxpayers before federal and California courts and Agencies regarding income, franchise, sales, real property, estate and gift taxes since 1979

Basic Asset Protection Strategies

Two primary goals of asset protection planning are:

1) to limit any potential liability connected with a particular business or property to the assets or property related to that activity (thereby protecting you personally as well as assets or properties used for other activities) ; and

2) to limit the ability of a creditor who has obtained a judgment or other enforceable claim against you personally to take the assets or property held by any business entities in which you have an interest to satisfy any such judgment or enforceable claim.


With regard to the first primary goal, the limited liability features of corporations, limited partnerships and limited liability companies are typically used. As long as entity formalities are properly observed (including separate bank accounts and tax returns where required), placing each of your various businesses, properties and development projects in a separate entity will result in a limitation of liability from that activity to the assets of that entity. If you were personally the cause of some damage to another person or entity this limitation would not apply and you could be sued directly. Similarly, if one of your other entities was responsible it could be included in a lawsuit.


The traditional approach to this second goal has been to further complicate the life of creditors by introducing a second layer of indirect ownership. In the past this has usually taken the form of a family limited partnership, which holds all of the individual's ownership interests in entities. This additional protection is now possible by holding any LLCs, limited partnerships or corporations (as well as other investments or businesses) through a Nevada or Delaware LLC. Because for estate planning purposes, the interest in this LLC would be held in a revocable trust with you or someone you trust as trustee, the final structure is even more complicated.

These structuring methods are designed to limit creditors to assets directly held in your name. The primary technique is to hold assets in entities that make it difficult to seize the assets directly, particularly limited partnerships and LLCs. When this is successful, the creditor is limited to receiving any income or other distributions related to the debtor's interest in the entity. In some cases it may be possible to avoid making any distributions. In a more extreme scenario, a creditor who steps in the shoes of a debtor may receive taxable income (and resulting tax liability) without any cash distributions to pay such taxes (as a result of the "flow-through" taxation of partnerships and LLCs). When there are others holding partnership or LLC interests, a court is less likely to permit anything more than a charging order by the creditor.

CAVEAT: The trend in the law in some jurisdictions has been to begin to permit creditors in some situations to have access to assets in entities where in the past all that was available was a charging order. In California, there is still protection in the case of limited partnerships and LLCs, but this protection may be less effective when a single person is the owner of the entity (one of the theories for permitting only a charging order is to protect the other owners by permitting the business of the entity to continue without disruption to its assets). For now, using liability limitation and entity tiering techniques can provide significant protection and in any case is is a great improvement over holding and operating businesses and investments directly (or in general partnership form)


There still remains the question as to what type of entity is best for a particular purpose. Primarily for tax reasons, limited liability companies are usually the best candidate for real estate investment and development activities. For real estate activities in California, a limited partnership is sometimes used with an LLC as the general partner to reduce the impact of the California gross receipts fee for LLCs. For other businesses corporations or S corporations (a corporation that passes through taxable income and loss to the shareholders directly) are often utilized.

In the case of an LLC owned by an individual or a husband and wife the entity is ignored for federal and state income tax purposes. Tax free exchanges are also permitted to and from single member LLC's to and from the individual (or husband and wife) single member of the LLC. California LLC's are subject to an minimum franchise tax of $800.00 per year and an annual gross receipts fee (this can be greatly reduced by forming a California limited partnership with an LLC as the general partner). If an LLC is treated as a separate entity for tax purposes it can be structured so that it is taxable as a corportion or as a partnership (tax is paid by the partners on their income or loss, rather than at the entity level as in the case of a corporation).

Download information regarding California franchise taxes and gross receipts fees for LLC's in PDF format.


A final method that is used to protects assets is to part with ownership, which can also reduce your taxable estate for estate planning purposes. This can be accomplished by direct gifts to others or by using irrevocable trusts for the benefit of family members or others that you intend to benefit at some point in any case. Although primarily used for estate tax planning purposes, a Qualified Personal Residence Trust (QPRT) can also be used for asset protection purposes.

Under federal tax law an individual can give up to $14,000 per year to an unlimited number of other individuals without incurring gift tax. In the case of a husband and wife, a total of $28,000 can be given each year, regardless of whether the source of the gift is community property, joint tenancy property or separate property. An individual can in addition at any time during his or her lifetime give up to $5,490,000 to individuals other than a spouse without incurring federal gift tax. All gifts to a US citizen spouse are taxfree(foreign spouses have a limit of $149,000). There is also an exclusion for gifts of medical expenses and educational expenses (paid directly to the institution) in some cases. If the annual exclusion is exceeded in any year, a gift tax return is required, even if no tax is due.


Another factor which often needs to be considered is the availability of Medi-Cal in the event of a long-term stay in a skilled nursing facility. The rules in California are complex, but in essence there is no significant government assistance until the individual's assets have been first exhausted to pay such expenses. There are several categories of exempt assets that are not considered for this purpose.

However, in California the state is still entitled in some cases to recover expended funds from a residence or from certain annuities at the individual's death. An exception exists where there is a surviving spouse.

Transfers of assets other than exempt assets can result in a delay before Medi-Cal takes effect. The formula used is 1 month delay for approximately each $3,800 of assets transferred within 36 months of the commencement of the stay in the skilled nursing facility. In the case of transfers to an irrevocable trust, the look-back period is 60 months. Thus a long delay can result before an individual receives government assistance. And the actual cost of a suitable skilled nursing facility is likely to be much more than the formula amount (which is based on the average cost in California).

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

  1. A spouse (or a transfer to anyone else as long as it is for the spouse's benefit);
  2. A blind or disabled child;
  3. A trust for the benefit of a blind or disabled child;
  4. A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).

In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

  1. The applicant's spouse;
  2. A child who is under age 21 or who is blind or disabled;
  3. Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances);
  4. A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home; or
  5. A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.


One of the most aggressive asset protection strategies involves using an asset protection trust. This is an irrevocable trust for the settlor's benefit with a spendthrift clause and a third party as trustee. Such trusts can be formed in Alaska and Delaware as well as in other states or offshore juridictions. However, in addition to the many legal and tax issues connected with such trusts, it must be emphasized that such trusts are irrevocable and the selection of trustee and location is critical to attempt to avoid loss of assets transferred to such entities.