No, it’s not the latest trendy cocktail on the club scene, a Cowboy Cocktail is a double-barreled approach to asset protection that may be the best thing since sliced bread. Wyoming is one of the few states to enact laws allowing domestic asset protection trusts. By combining the Wyoming Domestic Asset Protection Trust with a Wyoming LLC you can get the best asset protection available.
The Wyoming LLC
Wyoming is perhaps the best state in which form LLCs. Wyoming was the first state to enact LLC legislation in 1977. In July 2010 Wyoming updated their statutes to provide charging order only protection. Under W.S. 17-29-503, “[The Charging Order] is the exclusive remedy by which a person seeking to enforce a judgment against a judgment debtor, including any judgment debtor who may be the sole member, dissociated member or transferee, may in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest or from the assets of the limited liability company.” This update to the statue clarified that in Wyoming, even a single member LLC is entitled to charging order only protection. So effectively if a judgment is entered against a member of a Wyoming LLC, the judgment creditor cannot force any distribution of the assets of the LLC and will be liable to pay income taxes on any income of the LLC even if not distributed.
Setting up a Wyoming LLC is relatively easy and inexpensive compared to jurisdictions like Delaware and the ongoing administrative burdens are light. You do have to hire a Wyoming registered agent, but costs for that are low, generally running under $250 per year.
In addition to the benefit of charging order only protection, and the ease of setup and administration, Wyoming has no income tax, so LLC’s which generate income in Wyoming are not subject to paying any income tax in Wyoming.
The Second Barrel, The Wyoming Domestic Asset Protection Trust
A Domestic Asset Protection Trust allows you to set up your own trust, put assets into that trust and protect those assets from creditors. In most jurisdictions, a self-settled spendthrift trust such as this would not be recognized, but several US states have enacted legislation allowing the creation of such trusts. Wyoming has it’s own Domestic Asset Protection Trust and when combined with a Wyoming LLC into a Cowboy Cocktail, the concoction is potent. Generally, a Domestic Asset Protection Trust is an irrevocable trust with an independent trustee who has absolute discretion to make distributions to a class of beneficiaries including the grantor (the person who created the trust). By creating the trust in this way, the assets put into the trust are not reachable by creditors. The primary goals of a DAPT are asset protection and tax minimization.
In a Cowboy Cocktail, the Wyoming DAPT owns the LLC units of the Wyoming, LLC. The LLC’s income is thus distributed to the DAPT instead of the judgment creditor holding a charging order. This means the income stream from the LLC is now protected. The Trustee of the DAPT then has discretion to distribute trust assets to or for the benefit of the beneficiaries of the DAPT.
If you’re concerned about protecting your assets from creditors or predators, the Cowboy Cocktail may be just the right drink for you.