Q: LLC for brokerage trading account and investment account?
I am a day trader with a 475 mark-to-market election, and I have a brokerage account where I am actively trading. I also have an investment account, in which I do not trade and a separate IRA account.
My husband runs a small company as a sole proprietor. Since his business carries a high risk of potential litigation from 3-rd party businesses and state agencies, and we live in AZ which is a community property state, we recently signed and notarized a Transmutation Agreement, which separates the assets each of us owns.
However for additional asset protection, I am considering to establish an entity, possibly an LLC, and to transfer my two brokerage accounts into it (the 475 mark to market and the investment account).
Would this provide additional level of asset protections in case my husband's business got sued or demanded payment from a state agency?
A:
Creating an LLC and transferring your brokerage accounts into it can provide an additional layer of asset protection, as it separates your personal assets from your husband's business liabilities. However, there are several factors to consider:
1. Charging order protection: Arizona LLCs offer charging order protection, meaning that if your husband's business is sued, creditors can only claim distributions from the LLC, not the underlying assets.
2. Fraudulent transfer: Ensure that the transfer of your accounts to the LLC is not seen as a fraudulent transfer to avoid creditors. Timing is crucial, and it's best to do this before any potential lawsuits arise.
3. LLC management: If you are the sole member and manager of the LLC, it may provide better protection than if your husband is also a member or manager.
4. Tax implications: Transferring your accounts to an LLC may have tax consequences, especially considering your 475 mark-to-market election. Consult with a tax professional to understand the implications.
5. Brokerage firm policies: Some brokerage firms may have restrictions on opening accounts for LLCs or may require additional documentation.
6. Operating agreement: Have a well-drafted operating agreement that clearly outlines the LLC's purpose, management, and distribution of profits.
While an LLC can provide an extra layer of protection, it's not foolproof. In some cases, courts may pierce the corporate veil if the LLC is not properly maintained or if it's used for fraudulent purposes.
It's essential to consult with an asset protection attorney and a tax professional familiar with your state's laws and your specific situation to determine the best course of action for protecting your assets while minimizing tax liabilities.
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