After the way the economy has suffered in recent years, you may be wondering how you can protect your earnings, especially as the economy looks to improve next year.
Wyoming, recently deemed “the most business-friendly tax system of any state” for the sixth year in a row by the 2013 edition of the Tax Foundation’s State Business Tax Climate Index, may have the answer.
Long known as a progressive state for asset protection, Wyoming has a double-barreled approach. Nicknamed a “cowboy cocktail,” the state combines a domestic asset protection trust with a limited liability company for total asset protection.
Wyoming is one of a dozen states to enact laws allowing domestic-asset protection trusts. A Wyoming DAPT is a self-settled, irrevocable, spendthrift trust. This means that the grantor also may be the beneficiary but is not the trustee of the trust. The independent trustee has absolute discretion to make distributions to a class of beneficiaries including the grantor (the person who created the trust).
These types of trusts often are set up for “spendthrifts” who otherwise might spend all of the trust’s money. But they also serve to protect your assets, because you are not legally in control of them.
The Wyoming DAPT owns the LLC units of the Wyoming LLC, the second barrel of the “cocktail.”
Wyoming in 1977 was the first state to enact LLC legislation. An LLC combines the limited liability of a corporation and the ease of management and flow-through income-tax treatment of a partnership.
In July 2010, Wyoming updated its statutes to provide charging-order-only protection, even for single-member LLCs. A charging order is a court order that instructs the LLC to pay any income that is distributable to the LLC owner to the judgment creditor instead. In a “cowboy cocktail,” the LLC’s income is distributed to the DAPT instead of the judgment creditor holding a charging order. But the creditor still is liable for income tax on the income earned by the LLC.
In other words, the judgment creditor may have to pay income taxes on phantom income. This legislation discourages frivolous law suits. This means the income stream from the LLC now is protected. The DAPT’s trustee then has discretion to distribute trust assets to or for the benefit of the beneficiaries of the DAPT.
Setting up a Wyoming LLC is relatively easy and inexpensive compared to jurisdictions like Delaware, and the ongoing administrative burdens are light. Wyoming law requires each LLC owner to hire a Wyoming registered agent, but costs for that are low, generally running less than $250 per year. In addition, Wyoming has no income tax, so LLCs which generate income in Wyoming are not subject to paying any income tax in Wyoming.
When a Wyoming Domestic Asset Protection Trust is combined with a Wyoming LLC into a “cowboy cocktail,” the concoction is potent. If you’re concerned about protecting your assets from creditors or predators, the “cowboy cocktail” may be just the right drink for you.
 
Barid of Richmond Hill and Smith are co-founders of Savannah-based Smith Barid LLC, which specializes in elder law, estate planning and special needs planning.