I have received many inquiries about asset protection of a debtor’s membership interest in a single member Florida limited liability company. Many attorneys and debtors are concerned about bankruptcy decisions in a few states which have allowed creditors to seize the membership interest of a single member LLC despite statutes in those states which, like Florida statutes, limit creditor remedies to a charging lien. I have previously commented in this Blog that this is an area for Florida debtors to watch, but that planning in Florida should not be dictated by isolated bankruptcy decisions in other states. I often use a medical analogy to explain my views to clients: in medicine, doctors do not immediately change established treatment protocols based on one or two contrary studies or adverse outcomes.
Nevertheless, those who wish to avoid the risk that a membership interest in a single member LLC may be attacked in some Florida court can employ a possible “fix” using a popular estate planning tool known as the intentionally defective grantor trust. A grantor trust is a trust which for income tax purposes is treated the same as its settlor. The fix involves setting up a two member LLC where one member is the business owner and the other member is the grantor trust established by the business owner. The grantor trust could have other family members as beneficiaries, and the trust would own a small interest in the LLC. Since the grantor trust is disregarded for income tax purposes, the IRS should treat this LLC as a single member LLC although for state law purposes it has two members. This arrangement would give the debtor a basis to distinguish the LLC from those single member LLCs which were subject to the adverse court rulings, but it would not change significantly the business structure and taxation.