A business in New Jersey, if organized correctly, can offer asset protection. A limited liability corporation (“LLC”) is ideal, but generally not considered complete asset protection. An LLC takes a business that is generally a sole proprietorship (owned and operated by one person) and, by filing with the New Jersey State Treasury, turns it into a corporation. The idea being that the corporation is now a separate entity from the person and as such, is responsible for its own debt, taxes and lawsuits. Shares of an LLC can be owned by one person or several, but a solely owned LLC may not share full asset protection.

The LLC that is owned by multiple partners gets its main asset protection advantage from what is known as “charging orders” [Title 42. Chapter 2C. Revised Uniform Limited Liability Company Act, 1-94 – C.42:2C-1 to 42:2C-94, (March 18, 2013). A single owner of an LLC may or may not take advantage of charging orders because they are meant to protect other owners from creditors attempting to liquidate the LLC. A charging order is a court order, in favor of a creditor of one of the LLCs members, stating that the stocks or shares of the LLC are responsible for the amount owed. This means that the creditor does not have any control over the LLC and can only collect from the distributions to that single debtor. In other words, it protects the other LLC partners from having to deal with a new partner. This allows the other partners not to be subject to any financial loss stemming from one partner’s financial distress.

Although this is a good method to protect a business and separate the business from one’s personal assets, it may fall short. There are many cases where an LLC officer is held personally liable for acts, such as consumer fraud [Root Jewelers v. JDR Contracting, 233 N.J. Super. 125 (App. Div. 1989)], misappropriation and conversion [Hirsch v. Philly, 4 N.J. 408, 416 (1950)], negligence [Duffy v. Bates, 91 N.J.L. 243 (E & A 1918)], negligence of omission [Francis v. United Jersey Bank, 87 N.J. 15 (1981)], and negligent contracting [Saltiel v. GSI Consultants, Inc., 170 N.J. 297 (2002)]. The best way to ensure that personal assets are separate from business assets are through the use of a well crafted irrevocable trust, such as the UltraTrust®.

The use of irrevocable trusts can be a two level shield against would be attackers. First, placing the LLC into a trust can add another layer of protection. Anyone trying to get through the protection of the LLC will run into the issue that a trust owns the business, not the individual. Also, when an owner is sued and the creditor attempts to attach a charging order against the business, they will likely be unsuccessful, as the trust owns the business, not the individual. A creditor cannot collect something that the debtor does not own. A well written trust, such as the UltraTrust®, includes language allowing the trustee to withhold funds in the event of a lawsuit. This trust, being irrevocable is out of the control of the debtor, so the creditor cannot force payment.

The second level of protection involves placing the bulk of one’s personal assets in an irrevocable trust. Again, when a creditor or successful lawsuit plaintiff attempts to collect, they will not be able to collect from the irrevocable trust. The assets and property in the trust will be safe and able to be used for the benefit of the family or other beneficiaries. A creditor cannot collect from someone who doesn’t own anything. This is the same strategy that can be used to protect assets from medicaid and nursing homes.

Putting all of or a significant amount of countable assets into an irrevocable trust more than five years before entering a nursing home, saves the assets from the astronomical cost of nursing home care. In New Jersey, a one may still retain the use of various assets, including $2000, a car, a home (if they intend to return) and various burial assets, among other minor assets. Any countable items or assets (those items or assets not carved out by medicaid as non-countable such as the one’s listed below) will be subject to a “spend down” until the person qualifies for medicaid.

So, if a person has $102,000 in countable assets when entering a nursing home, the nursing home will collect until there is only $2000 left (less than 1 year of nursing home care). These funds will be lost and not passed on to the family. In fact they can’t even be gifted. If one were to take that $102,000 and place it in an UltraTrust® more than five years before entering a nursing home, those assets would be owned solely by the trust and would not count towards the medicaid spend down. All $102,000 would be passed on to the beneficiaries.

Another method, which may work much closer to the time someone is to enter a nursing facility, is the purchase of an actuarially sound annuity. Although this method does not protect as many of the assets as an irrevocable trust, it will protect more than simply doing nothing. An annuity is a contract, bought and paid for, where the entity selling the agreement agrees to pay out sums of money as income over a period of time. New Jersey, in particular, makes an effort to make sure that the payment is actuarially sound, meaning that the payments are consistent with life expectancy. By making sure they are actuarially sound, New Jersey is attempting to thwart people from abusing these annuities solely to qualify for medicaid.

The methods outlined above, although relatively simple to explain, may be quite complicated. One should contact an expert in LLCs, irrevocable trusts and medicaid annuities, such as those at Estate Street Partners. If the annuities, LLC and/or irrevocable trusts do not contain the correct language, one may not be afforded the protection that they expect. Estate Street Partners and the UltraTrust® can help meet and exceed expectations for asset protection in New Jersey.