If you think back to the 80s, you might remember the McDonald’s McDLT (check out the commercial below if you don’t remember). McDonald’s was selling a burger with packaging that kept the hot side hot, and the cool side cool. Although the McDLT didn’t last, the hot vs. cool asset strategy is used in smart asset protection and estate planning protection.
Separating Asset Classes
All assets and activities have different levels of lawsuit liability and risk. The more likely that an asset or activity will lead to a lawsuit, the hotter it is. For example, rental real estate is a hot asset because it is a source of liability like a lawsuit from tenant accidents, environmental clean-up, etc. Stocks and bonds are cool assets because they do not expose you to liability. Any smart asset protection attorney is going to design an ownership structure that prevents your hot, liability-producing assets from “infecting” your cool, safer assets. If all of your assets are owned together, then you risk losing your cool assets from liability created from your hot assets.
A common, bad structure
Many business owners form a single LLC for their business structure. While this can be fine at the beginning, as a business begins to gain value and increase assets, it becomes risky to continue with this ownership structure. A business might purchase property or develop valuable intellectual property as time goes by. There is no reason to own these assets together with the same business entity that you conduct “hot” activities such as employing people and selling services. You don’t have to put all your eggs in one basket as the saying goes. A simple solution is to create separate business entities to segregate the hot from the cool assets or activities. For example, a doctor who owns the building where his medical practice is located, would own the building in one entity, and then lease the office space to his other business entity that provides services to patients.
So what structure is good for you? The answer will depend on what you own, what activities you do, and your risk tolerance. Talk to an asset protection attorney to determine what solution is best for you.
Colin Ley is a Seattle asset protection attorney. He is also the co-founder of LayRoots along with his wife, Shreya.
