Investors holding substantial portfolios of stocks, bonds, and other financial assets face exposure to personal liability claims. A car accident, professional malpractice claim, or personal guarantee gone wrong can put investment accounts at risk. A portfolio preservation LLC provides a structural layer of protection by holding investment assets in an entity that limits what judgment creditors can reach. Understanding how this protection works, including the charging order remedy and its limitations, helps investors make informed decisions about structuring their holdings.
What Is a Portfolio Preservation LLC?
A portfolio preservation LLC is a limited liability company formed specifically to hold investment assets such as brokerage accounts, publicly traded securities, bonds, mutual funds, and other financial instruments. The LLC exists separate from its owner, creating a legal distinction between personal assets and assets owned by the entity.
Unlike an LLC formed to operate a business, a portfolio preservation LLC typically does not engage in active business operations. Its purpose is to hold and manage passive investments while providing a liability barrier between the investor’s personal creditors and the investment portfolio.
The LLC can be structured as either a single-member or multi-member entity. The choice affects the level of creditor protection available, as discussed below. The investor typically serves as manager of the LLC, maintaining control over investment decisions while the LLC formally owns the assets.
Inside Liability vs. Outside Liability
Understanding LLC asset protection requires distinguishing between two types of liability exposure.
Inside liability refers to claims arising from the LLC’s own activities. If the LLC owned rental property and a tenant was injured, the resulting lawsuit would target the LLC directly. For a portfolio preservation LLC holding only passive investments like publicly traded securities, inside liability is minimal. Stocks and bonds do not injure people or create contractual disputes in the same way that operating businesses or rental properties do.
Outside liability refers to claims against the LLC member personally, unrelated to the LLC’s activities. If the LLC member causes a car accident or faces a professional malpractice claim, the resulting judgment creditor might try to reach the member’s assets, including their ownership interest in the LLC. This is where charging order protection becomes relevant.
Because portfolio preservation LLCs hold what are sometimes called safe assets (assets that do not themselves generate liability), the primary concern is protecting those assets from the owner’s outside creditors rather than shielding the owner from claims arising from the LLC’s operations.
The Charging Order Remedy
The charging order is the key mechanism that protects LLC assets from a member’s personal creditors. Under the Uniform Limited Liability Company Act and similar state statutes, a judgment creditor of an LLC member cannot simply seize the LLC’s assets or force the LLC to liquidate. Instead, the creditor’s remedy is limited to obtaining a charging order from the court.
A charging order is essentially a lien on the debtor-member’s right to receive distributions from the LLC. If and when the LLC makes distributions to its members, the charged amount goes to the creditor instead of the debtor-member. The creditor does not become a member of the LLC, cannot vote on LLC matters, cannot force distributions, and cannot directly access the LLC’s underlying assets.
This protection exists because LLCs are designed to prevent unwanted third parties from becoming members. A creditor stepping into the shoes of a member would disrupt the business arrangements among the existing members. The charging order balances creditors’ rights against the interests of non-debtor members by giving creditors access to economic benefits without membership rights.
The practical effect is significant. If the LLC does not make distributions, the creditor receives nothing despite holding the charging order. The LLC’s manager, often the debtor-member in a single-member LLC, controls distribution decisions. This creates negotiating leverage because the creditor may prefer to settle for less than full value rather than wait indefinitely for distributions that may never come.
State Law Variations
Not all states provide the same level of charging order protection, and this is particularly important for single-member LLCs.
Strong protection states like Wyoming and Nevada explicitly provide that the charging order is the exclusive remedy available to a judgment creditor, even for single-member LLCs. Wyoming Statute Section 17-29-503 states that a charging order is the exclusive remedy by which a judgment creditor may satisfy a judgment out of the judgment debtor’s interest in an LLC. Nevada’s statute contains similar language. In these states, creditors cannot foreclose on the membership interest or petition for dissolution of the LLC.
Moderate protection states provide charging order protection for multi-member LLCs but may allow additional remedies against single-member LLCs. The reasoning in some courts has been that charging order protection exists to protect innocent co-members from having an unwanted creditor thrust upon them, but when there are no other members, this rationale disappears. The Florida case Olmstead v. FTC allowed creditors of a single-member LLC to reach the membership interest directly. Texas amended its statute in 2023 to clarify that charging order protection applies to single-member LLCs as well.
Investors should consider forming their portfolio preservation LLC in a state with strong single-member charging order protection, regardless of where they reside. Wyoming is particularly attractive because it combines strong charging order protection, no state income tax, privacy-friendly laws, and low formation and maintenance costs.
Tax Implications of Charging Orders
An interesting consequence of charging order protection involves taxation. When an LLC is taxed as a partnership or disregarded entity, income flows through to the members for tax purposes regardless of whether distributions are made. Some courts have held that when a charging order is in place, the creditor becomes the assignee of the member’s economic interest and must report their share of the LLC’s taxable income even if no distributions are received.
This creates what is sometimes called a phantom income problem for creditors. The creditor may owe taxes on income they never actually received, making the charging order a less attractive remedy. This tax consequence can further incentivize creditors to negotiate settlements rather than hold charging orders indefinitely.
Operating Agreement Provisions
The LLC’s operating agreement can enhance asset protection through carefully drafted provisions.
Discretionary distribution clauses give the manager sole discretion over when and whether to make distributions. Mandatory distribution clauses, by contrast, could provide a creditor holding a charging order with predictable payment streams. The operating agreement should avoid any language requiring distributions at specified intervals.
Transfer restrictions limit the ability of members to transfer their interests without manager or member approval. These provisions prevent creditors from acquiring full membership interests even if state law would otherwise permit foreclosure on a membership interest.
Poison pill provisions allow the LLC to redeem a charged interest at a reduced value, further diminishing what a creditor might recover. While aggressive, these provisions can provide additional deterrent effect.
Anti-partition clauses waive any right to seek partition of LLC assets, preventing creditors from arguing that the LLC should be dissolved and its assets distributed to satisfy judgments.
Limitations and Considerations
Charging order protection is not absolute, and investors should understand its limitations.
Fraudulent transfer law still applies. Transferring assets to an LLC after a claim arises or when insolvent can be challenged as a fraudulent conveyance. The transfer may be reversed, and penalties may apply. Asset protection planning must be done in advance, before any claim exists.
Bankruptcy presents additional risks. Federal bankruptcy law under 11 U.S.C. Section 548(e) allows trustees to avoid transfers to self-settled trusts made within ten years of bankruptcy. While this provision specifically targets self-settled trusts rather than LLCs, bankruptcy courts have broad equitable powers and may scrutinize aggressive asset protection structures.
Federal tax liens and certain other government claims may not be subject to charging order limitations in the same way private creditors are.
The LLC must be properly formed and maintained. Commingling personal and LLC funds, failing to observe formalities, or treating the LLC as an alter ego can result in veil piercing, eliminating the liability protection entirely.
Combining LLCs with Asset Protection Trusts
For maximum protection, some investors hold their LLC membership interests in a domestic asset protection trust rather than in their individual names. This creates two layers of protection: the charging order protection of the LLC and the spendthrift protection of the trust.
Under this structure, the investor creates a Wyoming asset protection trust and contributes their LLC membership interest to the trust. The investor can be a discretionary beneficiary of the trust while the trust owns the LLC. A creditor must penetrate both the trust’s protections and the LLC’s charging order protection to reach the underlying assets.
Wyoming’s combination of strong DAPT statutes, exclusive charging order remedy for single-member LLCs, no state income tax, and sophisticated trust infrastructure makes it particularly suitable for these multi-layered structures.
Conclusion
A portfolio preservation LLC provides meaningful protection against personal lawsuit claims by limiting creditors to the charging order remedy. Investment assets held in the LLC cannot be directly seized by judgment creditors, who must instead wait for distributions that may never come. The strength of this protection depends on state law, with Wyoming and Nevada offering the most robust statutory frameworks.
Proper planning requires forming the LLC before any claim arises, maintaining the entity properly, and considering whether additional protection through an asset protection trust is warranted.
For guidance on structuring a portfolio preservation LLC for maximum lawsuit protection, consider consulting Mark Pierce and Matt Meuli at Wyoming Trust Attorney.