What is an LLC?
A Limited Liability Company (“LLC”) is a type of business organization that is comprised of members (the owners) and the managers. In recent years, the LLC gained prominence as both an effective business entity and an estate planning tool. It is recognized in all 50 states and it provides most, if not all, of the benefits of a corporation, yet is usually taxed as a partnership. This allows an LLC to avoid tax problems sometimes associated with the corporate business form.

The LLC has two features distinguishing it from other types of business entities. First, an LLC possesses the corporate characteristic of limited liability for all its members without the burden of corporate formalities. This characteristic shields the individual LLC members from personal liability beyond their investment or capital commitment to the LLC for the debts and obligations of the LLC. Second, an LLC possesses the income tax flow-through attributes of a partnership. Unlike other types of business entities, the LLC avoids the infamous double taxation problems associated with the traditional C corporation.

Due to the flexible nature of LLCs, these entities are favored as a part of comprehensive estate plans to achieve your gifting objectives, minimize potential estate tax liability upon your death, and protect your personal and business assets from the claims of creditors.

How do LLCs offer asset protection?
An LLC can protect your personal assets from being used to pay creditors of your business. If you structure your estate to limit the potential impact of a malicious lawsuit or other attacks on your financial security, you may want to implement your LLC in conjunction with a Family Limited Partnership (“FLP”). 

An FLP is another type of business organization that is comprised of general and limited partners. The general partner is an owner of the FLP, and manages the day to day activities of the FLP. The limited partners are the other owners of the FLP, but do not take part in managing the entity. While limited partners in an FLP are protected from personal liability beyond their investment in the FLP, the general partner is not. To avoid that liability however, you can create an LLC and designate it as the general partner of your FLP to protect assets you place into your FLP from the reach of creditors. As manager of the LLC, you also maintain full powers of management and control over the FLP and its assets. As the General Partner of your FLP, your LLC benefits from the same kind of protection against creditors as do all members of the FLP.

When your LLC is the general partner of your FLP, the liability of the LLC General Partner is limited to the assets you kept in your LLC. Potential creditors are severely limited in assets they can reach if you minimally capitalize your LLC. However, you must keep sufficient assets in your LLC for state law purposes. If you are sued, a properly designed LLC Operating Agreement and adherence to the organizational structure can prevent creditors from taking control of the FLP from your LLC General Partner and liquidating the FLP to gain access to its assets.

How do I create an LLC?
To form an LLC, you must file Articles of Organization with the Secretary of State in the state you intend to form your business. The LLC is governed by an Operating Agreement which is like a partnership agreement or bylaws of a corporation. Individuals or other entities who invest in the LLC are referred to as members and are the equivalent of corporate shareholders.

To create an LLC in Nevada, the law requires you to do so with at least one person or one business entity. Some states require two people or business entities. If there are two people involved, the LLC is normally taxed as a partnership. However, if one person owns the LLC the entity is taxed as a sole proprietorship. In Nevada, any one or more persons may form an LLC for any lawful purpose except insurance. A corporation, general partnership, S corporation, limited partnership, or trust all qualify to be members of an LLC. With some exceptions, the law generally allows you to convert an existing limited or general partnership into an LLC without adverse tax consequences. The conversion would be treated as a liquidation of the corporation when converting from a C or an S corporation to an LLC. This conversion is a taxable event likely resulting in the recognition of taxable gain equal to the difference between the fair market value and the adjusted basis of the corporate assets transferred to the LLC. You should seek advice from a competent tax attorney if you consider such a conversion.

Our attorneys are well versed in LLC and FLP creation and utilization. To discuss how you might use an LLC or FLP (or combination of the two) as a part of your estate plan to achieve your family’s unique goals, contact us today to set up an appointment at (702) 433-4455.

More and more clients are seeking asset protection as jury awards and the number of frivolous lawsuits continues to increase, in order to preserve their hard-earned assets to pass on to future generations. Such asset protection is available in various forms, including limited liability companies, corporations, homesteads, qualified retirement plans, offshore trusts, and domestic asset protection trusts. As of the date of this article, 18 states have adopted some form of Domestic Asset Protection Trust (“DAPT”) statute¹. Such statutes are not solely for the benefit of the residents of those 18 DAPT states. California has not yet passed a DAPT statute, however, many residents of California can still enjoy many of the protections DAPT states afford as long as certain conditions are met. This article discusses and explores the requirements of implementing a successful asset protection plan in such a situation, in which a California resident (a non-DAPT jurisdiction) sets up a Nevada DAPT. This article will show that a Nevada DAPT, structured as outlined below for a California resident, should provide a real benefit to the settlor by either (1) being upheld in its entirety if challenged, or (2), if a dispute arises, lead to an attractive settlement.²

First, the California resident must be a good candidate for a Nevada DAPT. To be a ‘good candidate’ the California resident should not have any impending litigation or creditor issues, and have other reasons for setting up the trust, which may include tax reasons – using up a lifetime exemption, taking advantage of Nevada’s income tax laws, gifting assets to reduce an estate for estate tax purposes; or other reasons such as pre-marital planning, protecting beneficiaries (other than him or herself) against potential ex-spouses, their creditors, etc. It is important for the drafting attorney to perform due diligence on the client to ensure that they are a qualified applicant and are not engaging in this type of planning to hinder, delay, or defraud known creditors.

In our example, we will assume that the California resident’s DAPT is in compliance with the Nevada DAPT statute and possesses the circumstantial factors described in the complete article.

Click here to download the full article.

¹ See Steven J. Oshins, “8th Annual Domestic Asset Protection Trust State Rankings Chart” (April 2017) (States with some form of DAPT Statute: Alaska, Colorado, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming).
² Thomas E. Greene III, “Structuring Self-Settled Trusts for Non-Resident Settlors,” Trusts & Estates, 29-35 (November 2016).

In a recent decision by the United States District Court, District of Nevada, in the case of In re Cleveland, that Court affirmed its position that a trustee in a Chapter 7 bankruptcy succeeds to all of a debtor’s rights in such debtor’s single-member LLC.  2014 WL 4809924 (D. Nev. Sept. 29, 2014).  These rights include the power to control the LLC and to sell the assets of the LLC.

Under Nevada state law, a judgment creditor of an LLC member is entitled only to a charging order to enforce its judgment.  NRS § 86.401.  The charging order is the exclusive remedy, and this is the case no matter if the LLC has only a single-member or not.  With a charging order, the judgment creditor can only claim distributions that would have been made to the member.  In other words, each time the LLC is to make a distribution to a member subject to a charging order, the creditor that obtained the charging order can direct the LLC to make the distribution to it instead of to the member.  The judgment creditor cannot, however, reach the LLC’s assets with a charging order.

The In re Cleveland decision, although decided by the United States District Court for the District of Nevada, does not limit the trustee in a Chapter 7 bankruptcy to only a charging order when it comes to single-member LLCs.  Instead, in a bankruptcy situation, which is governed by federal law and which preempts state law, the trustee is permitted to control and otherwise sell the assets of a single-member LLC – something that cannot be done with a charging order.  This distinction between state and federal law is important and should be considered when forming an LLC and certainly when a member of a single-member LLC is contemplating bankruptcy.

I’m a “do-it-yourselfer.”  Ask my colleagues about all the home improvement stuff that I try to do myself.  I’m pretty handy and most projects turn out really well (at least I think so).  But there are three things I won’t touch:   1) high voltage electricity  2) natural gas  3) serious plumbing (soldering copper pipes, etc.).  The reasons that I won’t mess with these are that the risks outweigh the savings I might realize by doing it myself.  For projects involving these things I willingly hire a professional – someone with experience, education, and reputation.

Some people attempt “D.I.Y.” legal matters.  Let’s put asset protection in the category of things that should not be attempted yourself, like high voltage electricity.  There’s too much at risk to structure your own asset protection plan.  Although it may not cost life and limb or cause your house to burn down, it could result in a bad outcome and you are probably better leaving it alone than trying yourself.  Please rely on experience, education, and reputation when selecting legal counsel for sophisticated planning.

A recent article in Forbes authored by Jay Atkisson sheds light on the continued scam of “asset protection kits” being sold to the public in seminars.  Be wary and do not fall for a “kit” containing asset protection secrets.  You need proper legal counsel familiar with federal and state laws in order to properly structure an asset protection plan.  Nevada remains a premier jurisdiction for domestic asset protection trusts and the attorneys at Jeffrey Burr can help you with a Nevada On-Shore Trust and other legal asset preservation techniques.

Nevada is one of just a few states in the U.S. that currently allows a strange creature known as a Series LLC.  A Series LLC is a statute-permissible division of one state-law limited liability company into subsidiaries, “cells” or “series;” each of which is a separate LLC for state law purposes.  This was added to Nevada law in 2005.  Nevada law states that the assets, liabilities, debts and obligations of each series are separate and apart from each other series.  The requirements for this separate treatment are: 1) each series must maintain separate and distinct records; and  2)the assets of the series are held (even indirectly through a nominee) separately from the other series; and 3)the articles of organization comply with the statute.  These requirements are really no more burdensome than if a person maintained more than one traditional LLC.

The articles of organization in Nevada provide a simple check-box to select a new LLC as a Series LLC.  It is also possible to amend the articles and select Series LLC treatment.  The biggest requirement, from our experience, seems to be the operating agreements.  We typically prepare an operating agreement for the “container” which would match the name of the LLC formed with the Nevada Secretary of State.  And then we create operating agreements for each series or cell in addition.

Some possible applications for a series LLC are: rental properties; property development; multiple franchises; taxicab companies; rental car companies; trucking companies; commercial property leasing, etc.

PROS:  The biggest advantage for most seems to be price.  Because you can have several LLC’s for the maintenance cost of one LLC (Secretary of State fees apply only to the container).  Easy expansion: adding a new series requires only an amendment to the container operating agreement and the drafting of a new operating agreement for the new series.

CONS: Business operations out of state: since the series LLC is a new concept, non-series states are unfamiliar with the concept and becoming eligible to conduct business outside of Nevada’s borders has proven difficult.  Since the LLC is rather new and unproven in case law, there may be a question of its efficacy.  But we have confidence that the series LLC should work well for Nevada residents that keep their business operations contained to Nevada.

Please contact our office for help with the creation of your series LLC.  The attached diagram shows a typical setup where the series are all part of the same LLC (represented by the cloud).

Probate is a court-supervised estate proceeding under which the probate assets of the decedent are controlled by the terms of the last will and testament of the decedent.  Probate is a lengthy, complicated and expensive procedure that is a matter of public record.  Probate should be avoided if possible.  The most common way to avoid probate is for the decedent during his or her lifetime to establish a revocable living trust and transfer his or her assets that would trigger a probate proceeding into the trust.  When the decedent dies, probate is avoided.  Administration of the trust is not court supervised, and is much quicker, simpler, far less expensive and confidential.  In such a case, the trust agreement, not the last will and testament of the decedent, is the key document that controls the ultimate disposition of the trust assets. The last will and testament of an individual who has created a revocable living trust is merely a “pour over will” that bequeaths (“pours over”) any probate asset into the trust and is administered pursuant to the terms of the trust.  Nonetheless, there is a law in Nevada that requires any person having possession of the last will and testament of a person they know is deceased to deliver it to the Clerk of the District Court which would have jurisdiction of the matter within thirty (30) days after learning of the death of the decedent.  The Clerk of the District Court currently charges an eighteen dollar ($18.00) last will and testament filing fee.

Most individuals are not aware of this law.  An individual such as a surviving spouse or child who has possession of the decedent’s last will and testament and has failed to file the will within the thirty (30) day period usually becomes very concerned when they learn of the law. What are the consequences?  The good news is there are no criminal or civil penalties or fines for failure to timely file the last will and testament with the Clerk of the District Court, and there are no “last will and testament filing police” actively enforcing the law and pursuing a person who violates the law. Also the Clerk of the District Court will not inquire as to when the person filing the last will and testament learned of the death of the decedent.  The law states that any person who fails to comply with the law without reasonable cause is liable to any person interested in the will for damages the interested person may sustain by reason of the failure to file the will. Accordingly, a person having possession of the last will and testament of a person they know is deceased should always deliver it to the Clerk of the District Court even if it is past the thirty (30) day period.

Attorney John Mugan

Many clients are under the impression that all estate planning documents made by a husband and wife are revoked upon a divorce.  While Nevada law contains provision to ensure that an ex-spouse does not inherit under the will, estate planning documents created during the marriage are not automatically revoked.  Estate planning documents can remain intact as to other beneficiaries named in the documents.  As a result, a failure to change estate planning documents post divorce can have devastating consequences.  In some unfortunate cases where documents are not changed prior to death, bequests can be unintentionally passed to a former spouse’s children or other relatives.

After a divorce, it is important to update estate planning documents to reflect changes in circumstances.  Clients generally desire to change power of attorney agents and beneficiary distributions.  If you have not updated your estate planning documents since your divorce, please call our office to set up a free consultation to discuss how you can update your estate plan.

Attorney – Corey J. Schmutz