5 Things Every Estate Planning Attorney Needs to Know About Using an Asset Protection Single Member LLC

smllc-document-formsBy Mason D. Salisbury, J.D.

Single Member Limited Liability Companies (or “SMLLCs”) are the basic building blocks of asset protection entities. For many clients, SMLLCs may be the only asset protection entity they need. However, not all SMLLCs are created equal as asset protectors and some (too many) are hardly worth the paper they are filed on. An asset protection SMLLC is specifically organized at every point to fight and win against creditor attorneys, that is, to actually provide asset protection if challenged.

Below are five things every estate planning attorney should know about using SMLLCs to protect client’s assets.

Tip #1: You Need an SMLLC Sales Plan

You need a sales plan because you are not going to put in the time to start or improve your asset protection SMLLC practice if you cannot see your way to a sufficient number of future SMLLC clients to justify the effort. If you need to spend some time to get a basic attorney understanding of an SMLLC’s asset protection qualities in your state, do it. The key is building your own comfort level when talking about SMLLCs as asset protectors. You want to be familiar with how an SMLLC protects clients from liabilities that arise from the assets owned by the SMLLC, the somewhat less but still very valid protection an SMLLC provides the assets it owns from personal judgments against the client or Living Trust owner (Florida, Kansas & New Hampshire SMLLCs do not provide this portion of LLC asset protection), and in addition to asset protection, the possibility of tax savings offered to small business SMLLCs electing Sub S tax status.

The vast majority of my SMLLC clients come from two places, my estate planning clients and CPAs.

SMLLC Client Source #1: Estate Planning Clients—If you are an estate planning attorney, you are perfectly positioned to market asset protection SMLLCs to your clients. Using the information in your estate planning questionnaire, you can spot when clients can benefit from an SMLLC and see if they already have an SMLLC that would benefit from an asset protection upgrade (which in my experience is about four out of five SMLLCs – – how do you know it’s one of the four – – I show clients one of my actual SMLLC op agreements and some of the other documents that come with it and I know immediately by their reaction what type of SMLLC they have). Two sets of clients are most likely to get SMLLCs or an upgrade.

First, I find clients that do not have an SMLLC, but could use one based on their assets or business situation, are quite receptive. Second are the clients with pre-existing SMLLCs who are getting Living Trusts. With Living Trusts, existing SMLLCs will need to be funded, meaning the SMLLC is getting a new owner. Once clients understand this, they see the logic in considering an upgrade to a new operating agreement. There are asset protection reasons why an SMLLC should have an operating agreement and a number more why that operating agreement should be drafted for the actual owner of the SMLLC, especially when there is a fundamental change in ownership, i.e., from an individual to a trust. Further, your asset protection SMLLC operating agreement will tie the structure of the SMLLC to provisions in the new Living Trust, unifying the client’s estate planning with the SMLLC asset protection, providing another benefit to funding the SMLLC with a new operating agreement. I would not talk clients out of Living Trusts by insisting on new operating agreements (clients are more likely to die than to have creditor problems), but I would not use the perfunctory one page “Transfer of LLC Interest” to fund SMLLCs without asking clients to consider funding with a new (and upgraded) asset protection operating agreement.

Also, how streamlined your SMLLC process is will determine how low you can go and still have a cost effective fee, and the more reasonable your fee, the more SMLLC clients you will get (see Tip #3 below for more information).

SMLLC Client Source #2: CPAs—I find new referral relationships with CPAs in the SMLLC area easier to establish than new referral relationships with financial planners and life insurance agents in the estate planning area. I think this is so because there is a fundamental difference between the relationships. When a financial planner or life insurance agent recommends an estate planning attorney to a client, the estate planning is rarely, if ever, required for the sale of stocks, bonds, or life insurance and thus, the recommender is often looking for more than just good estate planning in return.

However, with CPAs, often an SMLLC is necessary for the “sale” of the CPA’s lower tax plan for a prospective client’s business because only LLCs and corporations can elect Sub S tax status. Also, CPAs often look to save business clients tax dollars by having the clients split off business assets (e.g., the office condo or business equipment) from a one entity business to another entity or entities (SMLLCs) thus creating bigger tax write offs than were available when the business was a single entity. I find that since CPAs need SMLLCs for their clients, CPAs are more interested in your reliability, the reasonableness of your SMLLC fee, and the qualities of your SMLLCs than they are in what client referrals they may get back from you in return.

The bottom line is: Contact CPAs. They will listen to you about why your asset protection SMLLC is a better SMLLC (assuming a reasonable price) and if you convince them they will try it without worrying so much about a quid pro quo relationship. It never hurts to mention that, as an estate planner, you are perfectly positioned to spot estate planning clients with sole proprietorships that could benefit from good CPA advice on the prospective tax savings of a Sub S election.

Tip #2: Utilize Diagrams and Graphics

A picture is worth a thousand words and SMLLC asset protection can be illustrated very effectively with diagrams.

I find Microsoft Excel diagrams are best, because you can make them yourself to suit your own SMLLC theory and marketing. Plus, you likely already have Microsoft Excel as part of your word processing software. They take some time to do but once you have them, they are great to focus any conversation on the benefits of an asset protection SMLLC. Just point to the line blocking an “outside-in” judgement from getting at a valuable SMLLC asset and say, “That doesn’t happen by magic, just having an SMLLC doesn’t do it”, and you got their attention.

Use the diagrams with everybody – – including your clients, the CPAs you want to work with, the financial planners and life insurance agents you talk to about estate planning, and for presentations. Do them in color and if you don’t have a color printer, have the local office supply store print you some in color. Have the office store laminate a set or two for using in person with clients, CPAs, etc. You can also use these illustrations and graphics in PowerPoint slides as inserted pictures (some which you can see in my upcoming program, “How to Properly Set Up & Organize a Single Member LLC to Protect Your Client’s Assets” on June 10th).

Make them pretty enough and learn your basic SMLLC law and you can offer to do SMLLC presentations for the clients of financial planners and life insurance agents – – their clients are always more interested in hearing about asset protection than about financial planning or life insurance. You might even use SMLLC asset protection to get your foot in the door for estate planning. Remember, an asset protection SMLLC ties into a client’s Living Trust and I bet the financial planners and insurance agents haven’t heard that before.

Tip #3: Use an Automated Document Assembly Software

If you want to dramatically cut preparation and word processing time, improve the quality of your work, and sell an excellent asset protection SMLLC package at a truly competitive yet cost effective price, I highly recommend you get and learn HotDocs® legal document software.

A lot of attorneys are already utilizing HotDocs®, which is great, but I think it is obvious that having your own document generating templates for in-house use and for client use on your website is the future in our business. The basic HotDocs® software license, which can be used and can access HotDocs® templates, runs about $300. There’s also a more advanced software, where you can use other peoples’ templates as well as make your own templates, which runs about $800. As you can see, a very reasonable price for what you get from it.

I have the more advanced HotDocs® software and I have taken my Microsoft Word version of my asset protection SMLLC document and used them as the basis for my new HotDocs® Asset Protection SMLLC forms. I did the HotDocs® coding myself. It was a bit of a challenge but it was fun and great for my practice.

BONUS TIP: Use “Find & Replace” Templates (if you cannot get HotDocs®)

If, for whatever reason, you are not yet using your own HotDocs® document assembly software, then I strongly recommend you have a set of what I call “find and replace” templates for your SMLLC documents. You would use these “find and replace” templates as the basis for all new SMLLCs as opposed to using the last similar client SMLLC you did. If you try to “find and replace” through actual client SMLLC documents, no matter how good you are, you will leave old client information in new client documents from time to time. I know because I have done it myself.

Have templates for each document with up to date language. When you make permanent modifications to your SMLLC documents, do it in your templates. Use code words in your templates in each place where specific client information will go. I use things like, *LLC Name*,*LLC Address*, *Member Name*, *LLC Purpose*, etc. If you use the same symbol before and after the code words, chances are at least one of the symbols (for me it’s a “*”) will remain if you missed something and if you search your final docs for your symbol you will find the problem. Not only will the quality of your documents improve, but more importantly, you can speed up preparation time by using a systematic approach to the “find and replace” function by first using the same code words throughout all the documents and second, by searching one code word at a time through all the documents and then the next code word through all the documents, and so on. I have a separate memo of tips for this process which is included in the “Asset Protection SMLLC Package” discussed at end of this article.

Tip #4: Assist Your SMLLC Clients with Tax Form Follow-Up

If you want to ensure the best possible service to your clients, then you will need a few basic tax form preparation skills to assure your SMLLC clients actually follow through on required and recommended tax filings. And, frankly, clients love it when this is included in the fee for you to prepare the SMLLC. I have also found that CPAs do not mind you doing it – – especially since they make their money on tax preparation in perpetuity. And, most importantly, if you don’t do it for your client, it may not get done.

First, the SMLLC should have its own Federal Employer Identification Number (“EIN”) and you should master the IRS’ EIN online application. Asset protection SMLLCs should have their own EINs to help support the argument they are indeed separate and distinct legal entities from their owners. SMLLCs will also need their own EIN to open their own separate bank account.

Further, if the SMLLC elects Sub S tax status it also need its own EIN for tax purposes as well. You get the EIN online, your client gets it, or client’s tax pro gets it. I recommend you get it after getting the client’s permission to do so in your initial SMLLC Questionnaire.

Once you get the hang of it, online EINs are not hard to obtain. Read the IRS online instructions. Often you will find yourself obtaining the EIN and emailing it to your client along with the SMLLC’s filed formation document before you have completed the rest of the SMLLC package because your client is chomping at the bit to open the bank account and get the SMLLC off and running.

Second, if the SMLLC elects Sub S taxation (a question you have had your client ask their tax pro and then answer for you in the SMLLC Questionnaire) an IRS Form 2553, “Election by a Small Business Corporation”, needs to be filed.

Preparing a 2553 is even easier than obtaining the EIN. I recommend filling out the 2553 online, printing it, and sending it to the client with the final SMLLC documents. I put two inch by one-half inch sticky tabs on the 2553 with hand drawn arrows pointing to the lines clients need to sign and fill out. I direct clients in writing to review, sign, date, and then mail the 2553 to the IRS. Filing for Sub S status is time sensitive, so I also stick one “neon high visibility label” on the 2553 cover letter stating the 2553 is time sensitive and must be filed immediately. Since I started using the neon labels not a single client has missed the filing deadline.

Third, there will most likely also be a state tax equivalent filing to the Federal 2553 because the SMLLC is electing Sub S status. Either figure out your state’s Sub S equivalent initial tax filing requirement yourself (in my state it is registering the SMLLC as a corporation for tax purposes) or get the client’s tax pro to do it. I have made myself a “find and replace” formatted template of my state’s form and it is easy and quick to use. I send it to the client with the 2553. You can figure out your state’s requirement, if any, by calling your state’s taxing authority, asking another attorney, or asking your own CPA.

Also, I recommend you scan all the tax forms you send your clients with their sticky tabs in place (and you scan the cover letter as well if you stick a neon label on it) so you have a record of what you sent. I have separate memos of tips for these tax forms with a sample 2553 and a description of how I use the IRS EIN online application for SMLLC EINs, which is included in The Single Member LLC (“SMLLC”) Document Form Package.

Tip #5: Do It NOW!

There is no doubt that asset protection really is where the estate planning market is headed, particularly with the increasing “permanent” estate tax exemption. More and more, people are worried about protecting their hard-earned assets and utilizing a Single Member LLC is a great way to accomplish those goals.

As you can imagine, there are many more tips for starting or improving your asset protection SMLLC practice but to touch on them all, much less to explain them in depth, is beyond the scope of this article. This is why I’ve been asked by The Ultimate Estate Planner to put together a very special 90-minute presentation entitled, “How to Properly Set Up & Organize a Single Member LLC to Protect Your Client’s Assets” on Wednesday, June 10, 2015 at 9am Pacific Time (12pm Eastern Time). >>MORE INFO

On this program, I will get into further detail about the following:

  • How SMLLCs, not only provide significant asset protection, but can assist in funding a client’s Living Trust
  • How to prepare the client before your initial meeting, close more engagements, and make the drafting process more efficient by utilizing an SMLLC “Questionnaire”
  • How to simply and effectively explain to clients how SMLLC’s work and sell them in your meetings by just drawing out a few “boxes”
  • 11 key provisions that should always be included in an SMLLC Operating Agreement (and how to properly coordinate the Operating Agreement with the client’s Living Trust)
  • What other documents in addition to the Operating Agreement (and specific provisions in them) should be included in a complete SMLLC “Package”, such as:
    • Certificate of Authority
    • Assignment of Contract
    • Bill of Sale
    • Promissory Notes
    • “Attorney Letter” on future SMLLC operation for the client
  • How to set up your forms so you can easily and quickly produce all of these SMLLC documents for your clients
  • And much, much more!

Plus, when you order The Single Member LLC (“SMLLC”) Document Form Package (currently available at a 20% discount), you will receive complimentary registration to this presentation. For more information, click here.

ABOUT THE AUTHOR

mason-salisburyMason D. Salisbury is a 25-year member of the South Carolina Bar and a partner of the Law Office of Pelzer and Salisbury, LLC.  He earned his undergraduate degree in jurisprudence from the University of Baltimore and graduated from the University of Baltimore School of Law in 1987, with honors and as a member of the Law Review. Over the last 10 years Mason transitioned his practice away from going to court and creditor representation to focusing exclusively on estate planning, elder law, inheritance protection, and asset protection. You can reach Mason at (843) 723-1445 or by e-mail at [email protected].

 

Image courtesy of cooldesign / FreeDigitalPhotos.net

Comments

  1. Deanna R. Jones

    I really liked the fifth tip to prepare your estate right away. There are several things that I need to get through before I can start preparing my own estate for my family, but I need to get through them so that I can start writing up a will. I’m already pretty old, and I’m not getting any younger. It seems like I should plan my estate as soon as I can before something happens and I find myself in a hospital.

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  2. Alex Jennings

    Hey, Mason. I’m glad that you’ve shared this article with us. I agree with Deanna on this one: tip 5 is GREAT advice! Hiring an estate planning attorney can only benefit you, and they can be very helpful and knowledgeable. How long have you been in law for, Mason?

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  3. Grace Turner

    This website is great for knowing what my attorney should be doing. I really appreciate tip 2 about using diagrams and graphics. It is so much easier for people that aren’t professionals at this stuff to see a picture. It is important that clients understand what you are doing so that they can trust you as their attorney. Thank you for helping me find a good estate planning attorney.

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  4. June Robinson

    As someone who will want to hire an estate planning lawyer, I really like that this points out what qualities they should have so I know what to look for when hiring one. It is interesting to me that you point out the importance of utilizing diagrams and graphics so that you can keep on top of what is happening with your work. I imagine that that will help you have a good reputation with clients and show them that you are organized. Thanks for sharing this!

    reply
  5. Kyler B.

    My wife and I are trying to hire an estate planning attorney right now. This is the first time either of us have had to do this so we’re somewhat new to it. I liked this post, and we’ll be sure to provide our lawyer with diagrams and pictures in order to help him/her better aid us. Thanks for sharing!

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  6. Katie Anderson

    Great article Mason! In addition, I think finding a probate lawyer as soon as possible is also key. It can be hard when you are down to the wire searching for a good one. Your whole website has actually been really educational. Thanks!

    reply

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