FAPLLC Risks & Benefits

HOW TO USE A FAMILY ASSET PROTECTION LIMITED LIABILITY COMPANY IN MEDICAID PLANNING

If you are considering transferring you assets to your children for Medicaid planning purposes, the risk you take is that you are transferring your assets to your children. Here is a planning tool that we recommend to our clients that you may wish to consider for gifted assets.

Intended Beneficiary's FAPLLC. It is advisable that your intended beneficiary set up a Family Asset Protection Limited Liability Company (FAPLLC) which provides some limited protection for the assets transferred to him or her. You give up all rights to and control of the gifted assets to your intended beneficiary.

RISKS: If your intended beneficiary has no FAPLLC, the assets may be left to his or her spouse and his or her children under his or her Will or the Intestate laws. If your intended beneficiary's spouse inherits the assets, those assets may not be safe. If your intended beneficiary divorces, asset in his or her name may wind up in the spouse's hands. And, if your intended beneficiary is sued, his or her creditors may grab his or her assets. Remember, the children are in total control. There is no way to stop a dishonest child or children who decide to take the money. The FAPLLC is morally binding, not necessarily legally binding on the children.

BENEFITS (with some warnings and more information): The FAPLLC is for the purpose of reducing these risks. Note, however, if only one child establishes and owns the FAPLLC, some cases have ruled that creditors can pierce the FAPLLC and attach the assets. In order to obtain greater creditor protection, it is better to have two or more children establish and own the FAPLLC. Additionally, the children may have greater checks and balances on each other. The FAPLLC distributes out assets in equal shares to the owners, therefore it is preferable to have all the children who are to receive distributions be owners. However, the owners don't have to be the same as the managers, and only some of the children could be managing the assets and making distributions. We provide in the FAPLLC for a non-prorata distribution of assets while the FAPLLC is in effect. This is to allow only one or two of the children who are handling things to be able to take distributions out in order to give the money to you, rather than forcing equal distributions to all owners to provide the funds. However, the final liquidation of the FAPLLC is made pro-rata. If all the children who are to share in the liquidation are not owners, those who are owners have to be trusted to share the distributions to the other siblings. The other siblings could be unfairly treated.

Notwithstanding the risks and limitations, I would strongly recommend that your intended beneficiary set up a FAPLLC to protect your assets. Please keep in mind that assets transferred to your intended beneficiary are his or hers, and you have no control over what your intended beneficiary does with these assets. You cannot require him or her to execute a FAPLLC.

We normally assign the FAPLLC a name based upon your children's names or initials in order to disconnect the FAPLLC from you for Medicaid purposes. Your intended beneficiary should transfer the assets into the FAPLLC approximately 6 months after the assets are transferred by you to him or her.