What is a false sense of security? We do common sense things to keep our possessions and loved ones secure, locking our doors and keeping passwords is a form of Asset Protection. But we know that in reality, if we ever had time to think about it, there are lots and lots of ways in which we, our property, our community, our planet and our own reality is insecure. Inherent insecurity is why we plan in the first place. So for example, we do Islamic Inheritance because we know there is nothing about our life that is secure. That creates instability for others, and we hope to fix that by doing the responsible thing, our estate planning.
You have some protection
I did not want to write about that kind of security though. But instead, the type that you seek when you want to make sure what you own is still yours when there is some calamity. Namely, there is a lawsuit of some kind. You worked hard for your home. What did you do to protect it? How about protecting your business? Your retirement plan? Your rental property? What if one liability seeps into another thing?
Now some of these things may be more simple than others. A retirement plan may have some built-in asset protection from The Employee Retirement Income Security Act of 1974 (ERISA). You might not think of thought about some forms of asset protection you already have. For example, say Mustafa owns Apple. If is Apple itself sued (it happens all the time) nobody is coming after Mustafa’s home as a result of his ownership in Apple stock. Mustafa only risked what he invested to by Apple stock. His biggest risk is that Apple shares may become worthless.
There are many things that you can do for Asset Protection. One of the most obvious ones is the Limited Liability Company. I recently wrote a comprehensive guide to LLC and I don’t want to repeat that content. Feel free to check it out.
Treat it “Security” like a verb
Real estate owners often use LLCs, but it is also used for operating a business and a wide range of other assets. The kind of protection you get from an LLC varies widely. Much of it has to do with things like (1) the operating agreement (2) the jurisdiction the LLC is in and the most important one (3) how active and vigilant the owner is in managing the LLC’s business and legal affairs. I would like to say the third one is what trips people up the most (and that maybe is true). However, you would be surprised as to how frequently the other two things do as well.
The LLC should be a verb. It requires active vigilance. Otherwise, there is a risk “judgment creditors” will say that the LLC is just an extension of yourself. This allegation called an “alter-ego.” It would be like you don’t have an LLC at all and whatever you did to protect your personal, non-LLC assets would then be at risk. It is true that there are fewer required formalities in an LLC than a corporation. This is often this is cited as one of its advantages. However, it would be foolish not to follow a set of robust formalities.
Gifting to Children and Protecting them
For many Muslim families, another advantage of an LLC is that it makes gifting to family members easier. Many families, for a variety of reasons, want to give their children portions of their property to their children, while at the same time, maintaining control of the whole thing.
So say, for example, Hamid owns a four-plex. He places in a Limited Liability Company. Hamid wants to give 85% of the property to his daughters, for her future financial security. While at the same time, he wants to continue to control it, collect rents and maintain it without involving his children.
Hamid organizes the LLC so that it is the manager. He also keeps his voting rights. He takes steps, through ownership of the daughter’s membership units in a Trust, to make sure that in the event any of his daughters were divorced, sued or bankrupt, the property won’t fall into the wrong hands.
Handing over part of an LLC while alive is not an inheritance; it is a gift (or sometimes a sale) To go further than that, say protecting the interests from children’s potential future ex-spouses, you may need to be significantly more active in how you manage the LLC.
While no asset protection is impregnable, the benefits of common-sense measures to protect yourself and your family make perfect sense for some.
If you want to reach out to my office about Islamic Inheritance or an LLC, you can call (866) 403-5294 or contact us