State Law Asset Protection Trust Options

April 13, 2006

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When choosing a state in which to form your business entity, you need to weigh the relative advantages and disadvantages of the laws in certain states.

Forming the holding entity in Delaware or Alaska can be part of an overall asset protection plan because these states have statutes authorizing the creation of domestic asset protection trusts. However, this is a significant departure from domestic law in the United States. Accordingly, a trust created under either of these statutes could be challenged on jurisdictional grounds.

One way to bolster the validity of these trusts is to create additional "contacts" in Delaware or Alaska, where the trust is formed. Having a holding entity formed in Delaware or Alaska that funds the asset protection trust located there would create additional contacts in that state.

If you are forming a holding entity and an operating entity, consider forming the holding entity out-of-state, in particular, in Delaware, and the operating entity in your home state (or where the business's activities will be conducted).

Forming the holding entity out-of-state will produce no additional costs. There will still be only two state fees: one to form the holding entity and the other to form the operating entity. The small business owner should take the lead from larger businesses and consider Delaware as the site for the holding entity. This also may help sustain the validity of an asset protection trust formed there.

In addition, if fees are not a significant concern, consider forming both the holding entity and operating entity in Delaware, so that Delaware law will govern each entity. Here, the operating entity will have to register to do business in the owner's home state (or where the business's activities will be conducted), thus creating a third fee. However, this fee may prove to be an inexpensive form of insurance. This option is more attractive when the home state's limited liability company (LLC) statute does not effectively protect an owner's interest from his personal creditors.

Note, too, that, the Delaware LLC statute allows for the creation of multiple entities within the form of single entity. This can make formation of an LLC in Delaware less expensive.

The Business Tools section contains a Sample Articles of Organization that can be used to form an LLC in the state of Delaware. They also cover preparation of formation and operating documents.