When should I use a Charging Order Protection Entity (COPE) to provide additional protection to my assets from my personal liabilities?
While a COPE, Charging Order Protection Entity, is generally formed as an LLC, Limited Liability Company, it is important to have a basic understanding of the legal difference between a COPE and most LLCs. The best way to explain it is with an example.
The COPE LLC versus the Regular LLC
Suppose you’re a real estate investor. You want to protect your personal assets from liability from your rental investment properties business. Should a tenant sue you for injury due to your rental, you would want to have your personal assets protected from that lawsuit. To set up your business with this protection, you create an LLC. The LLC is the entity sued by the tenant, and your personal residence and other assets like retirement accounts are not threatened by the action. That’s the normal LLC and reasoning behind it. The LLC protects you from the actions of the business.
A COPE, in this example formed as an LLC, does the opposite. It protects the LLC from your actions. Suppose that you’re driving down the road texting a real estate agent about a property you’re considering buying. You cause an accident, and you’re being sued by the other party for injuries and damages. If you’re rental properties and rental business are inside a COPE LLC, they would have some protection from the personal lawsuit filed against you. The COPE protects the LLC from your actions.
How Much Protection is Provided by the COPE?
The structure and protections provided by the COPE LLC vary by state. Some states have much stronger protection than others to keep the LLC from being penetrated by creditors or litigants. You’ll need to check your state’s laws for how much protection a COPE can provide, but along a line of weakest to strongest, here are how some states are classified by legal experts:
Check your state’s laws to see if a COPE alone provides strong enough protection, or if you should combine a COPE with other measures to protect the assets inside the COPE.
The value of a COPE in the real world of legal actions is to create enough of a barrier to creditors or litigants that they are induced to settle their action or collections to avoid the hassle and high costs of attempting to penetrate the protections of the COPE.
When Will a COPE Not be Effective in Protecting Assets?
There are some situations where a COPE isn’t going to be effective in asset protection, regardless of the state in which it’s formed:
- You could guess that the IRS can penetrate a COPE to satisfy your personal tax debt.
- Gross negligence, fraudulent, or illegal activity on your part. The chances are that the courts can penetrate the COPE.
- In a divorce, the court can penetrate the COPE to divide assets according to the divorce settlement and state law.
Even with these limitations, the formation of a COPE entity could be a good idea for many who have considerable assets in a business that they want to protect from their personal liabilities. One reason is that it is relatively inexpensive to form a COPE when compared to most trusts.
With Tax Hive’s years of experience in tax and business services, we use our expertise to make your life easier so you can focus on building your business. Ever changing rules require a team who knows you, your business and the tax implications. Our tax professionals meet your needs while helping you manage tax risk, control costs and reap maximum benefit. If you’re ready to get started, CLICK HERE to see if you qualify for a FREE strategy session with one of our specialists today.