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Litigation and Creditor Protection Strategies Flashcards

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Read the first 7 Litigation and Creditor Protection Strategies flashcards as text

  1. What distinguishes an 'inside liability' from an 'outside liability' in asset protection?

    Answer: Inside liability arises from activities within an asset-holding entity; outside liability arises from the owner's personal activities

    Inside liability is a claim arising from the asset itself (e.g., a slip-and-fall on rental property), while outside liability is a claim against the owner personally that might reach into the entity.

  2. What does 'piercing the corporate veil' allow a creditor to do?

    Answer: Hold shareholders or members personally liable for entity debts

    Piercing the corporate veil is a court remedy that disregards the entity's liability shield and holds owners personally liable, typically when the entity was used as an alter ego or formalities were neglected.

  3. Which of the following practices most increases the risk that a court will pierce the corporate veil?

    Answer: Commingling personal and business funds regularly

    Commingling funds is a leading indicator that the owner treats the entity as their alter ego, the primary basis for veil-piercing claims.

  4. A Domestic Asset Protection Trust (DAPT) is best described as:

    Answer: A self-settled irrevocable trust in which the grantor can be a discretionary beneficiary

    A DAPT is a self-settled spendthrift trust permitted in certain U.S. states (e.g., Nevada, South Dakota) where the grantor can remain a discretionary beneficiary while receiving some creditor protection.

  5. Which U.S. state is widely recognized as having the most favorable Domestic Asset Protection Trust (DAPT) legislation?

    Answer: Nevada

    Nevada is consistently ranked among the top DAPT jurisdictions due to its short seasoning period (2 years), no exception creditors for alimony, and strong privacy laws.

  6. The purpose of a 'series LLC' in asset protection is primarily to:

    Answer: Segregate assets and liabilities across separate 'series' within one LLC filing

    A series LLC allows one master LLC to create separate series, each with isolated assets and liabilities, so a claim against one series cannot reach the assets of another.

  7. Homestead exemptions in asset protection primarily protect:

    Answer: The debtor's primary residence up to a state-defined value limit

    Homestead exemptions shield a debtor's primary residence (up to a dollar or acreage cap set by state law) from forced sale by most unsecured creditors.