Choosing the Right Jurisdiction for Your Structure

Michael Ioane

Article I

AUTHORITY ARTICLE

How Jurisdictions Affect Governance

The jurisdiction in which an entity or trust is established is one of the most consequential structural decisions in business and asset protection planning. Most business owners treat it as an administrative detail, forming their entities in the state where they live or where they do business without evaluating whether that jurisdiction’s law actually provides the protections they need. Michael Ioane treats it as a substantive planning decision because that is what it is.

The laws of the jurisdiction in which an entity is formed govern that entity’s formation, management, and dissolution. For trusts, the governing jurisdiction determines what protections apply to the trust assets, what rights the trustee holds, and what remedies creditors can pursue. These are not minor distinctions. The difference between a well-chosen jurisdiction and a poorly chosen one can be the difference between a structure that holds under challenge and one that does not.

What Jurisdiction Determines

When Michael Ioane describes jurisdiction as legal architecture, he means something specific. The jurisdiction determines the statutory framework within which the structure exists, including what governance provisions are enforceable, what creditor remedies are available and which are restricted, what rights owners and beneficiaries hold relative to management, how disputes are resolved and by which courts, and whether foreign judgments can be enforced against assets held within the jurisdiction.

These questions have direct practical consequences. An LLC formed in a state with strong, exclusive charging order protections offers meaningfully different creditor protection than the same LLC formed in a state where courts have interpreted charging order protections narrowly. The documents may be identical; the protection they provide is not.

Charging Order Protections

Charging order protection is one of the most practically significant jurisdictional variables in entity planning. A charging order is a statutory remedy that limits a creditor who has obtained a judgment against an LLC member or limited partner to a lien on the entity’s distributions, rather than allowing the creditor to seize the ownership interest itself or compel a liquidation. In states where charging order protection is the exclusive remedy against an LLC interest, this is a significant limitation on what a creditor can accomplish.

Some states have strong, exclusive charging order statutes. Others have weaker versions or have had their charging order protections eroded by court decisions that interpreted them in favor of creditors. The jurisdiction where the entity is formed determines which version applies. That determination is made at formation and persists throughout the entity’s existence.

Trust Law Variations

Trust law varies considerably across jurisdictions, and those variations affect what a trust can accomplish in terms of governance and protection. Some states have enacted domestic asset protection trust statutes that allow the person who creates and funds the trust to be a discretionary beneficiary while still receiving creditor protection from the trust assets. That feature is not available under the common law of most states and is not available in jurisdictions that have not enacted these statutes.

Perpetual trust terms, sophisticated protector roles, reserved powers provisions, and spendthrift clause enforcement all vary by jurisdiction. Michael Ioane evaluates the specific trust law of any jurisdiction under consideration rather than assuming that all domestic jurisdictions provide equivalent protections.

Governing Law Provisions

One dimension of jurisdictional governance that Michael Ioane addresses regularly is the governing law clause. A structure can often specify which jurisdiction’s law governs its interpretation and enforcement, even if it operates across multiple states or countries. A well-drafted governing law provision can preserve the protections of a favorable jurisdiction even when the structure’s assets, beneficiaries, or business activities are located elsewhere. This is not foolproof, and courts in some jurisdictions will decline to apply foreign law in certain circumstances, but it is an important tool in multi-jurisdictional planning.

Jurisdiction is the legal environment in which your structure lives. Choosing it carefully means choosing what that structure can actually withstand.

Michael Ioane’s books provide a detailed comparative analysis of jurisdictional features relevant to governance planning. They are available on Amazon for those who want a thorough treatment of this subject.

The information in this article reflects general structural principles and practical observations from consulting experience and is provided for educational purposes only. It should not be interpreted as individualized legal or tax advice.

Michael Ioane  |  MichaelIoane.com