Estate Planning Practice Blog

Entity Formation as a Form of Asset Protection.

Yesterday I posted about umbrella liability insurance policies as being a good start towards a complete asset protection strategy. Today's post deals with entity formation as another measure of asset protection.

The most commonly used entity formations including corporations, limited partnerships and limited liability companies. Entity formation can offer some degree of asset protection. 

A corporation can protect personal assets from a business liability. Personal assets of a shareholder in a corporation are not subject to liabilities arising from the corporation. However, for many small business owners who form corporations, the business owner still signs contracts, loans and other documents stating that he or she will be personally liable if the corporation cannot absorb the liability.

A limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The asset protection features of a limited partnership include protection of limited partners from liability for the business. The general partner remains liable. Also, creditors may be restricted from touching the partnership assets for a debt of a limited partner. The creditor can only stand in the shoes of the limited partner and receive whatever distributions a limited partner is entitled to receive. The creditor puts him or herself at risk because it can be liable for income taxes on the partnership income even though no distributions have been made. A limited partnership agreement must be properly drafted to afford this type of asset protection.

A limited liability company is very similar to a limited partnership except that there is no general partner and all members have limited liability. The type of asset protection offered is similar to that of a limited partnership. The major difference is that a general partnership in a limited partnership is personally liable. A limited liability company has a different taxation structure so to consider forming this type of entity, taxation matters should be considered.

How About Insurance First?

Asset protection is always a hot topic. It's very dynamic too as the legislature is trying to get one step ahead of current asset protection techniques. But before  getting into asset protection protection measures, clients must be counseled that having adequate insurance coverage is the best form of asset protection. 

This includes insurance for real and personal property, vehicles, umbrella insurance policies, malpractice insurance, commercial and other business insurance policies. 

Clients should discuss with their insurance agent or company whether their assets are covered and specifically add other assets needing coverage.

An umbrella liability insurance policy gives added liability protection beyond the limits on homeowners and other vehicle personal insurance policies.  Umbrella policies typically add an additional one to five million dollars in liability protection designed to come into force when the liability on other current policies has been exhausted.  

From personal experience, umbrella liability insurance premiums are very inexpensive considering the amount of insurance coverage added.  Further, in most cases, umbrella liability insurance covers non-business related activities wherever they may occur.

Homesteads Redux.

I've posted about homesteads before, but I thought I'd blog about it again as it is really an interesting concept.

Homestead exemptions refer to the protection given against a home from creditor claims. Some states have very generous homestead exemptions including Florida and Texas.

In California, every homeowner has an automatic homestead exemption of at least $50,000 for his or her residence. This protection does not require the signing or filing of any papers or documents.

The amount of the exemption increases to $75,000 if at least one member of the family unit living in the house owns no interest in the house, as, for example, when a homeowner lives with his or her minor children. If a homeowner is 65 years of age or older, or is physically or mentally disabled, the amount of the exemption is $150,000. The $150,000 exemption also applies to persons 55 years of age and older if the person is (1) single and has a gross annual income of not more than $15,000, or (2) married and the individual and his/her spouse have a combined annual income of less than $20,000, and the sale is involuntary. See the code here.

Homesteads can also be declared by filing a one-page document in the County Recorder where the property is located, but this does not offer added protection in California.

Because California offers a limited exemption, a creditor can force the property be sold to satisfy the debt.

Asset protection could include moving to a more favorable homestead exemption state. Texas and Florida both offer a more generous homestead exemption and can become a part of a client’s asset protection planning.

Florida exempts the entire value of the primary residence, whether a condo, mobile home or single family home, as a homestead from a forced sale by creditors both during the lifetime and after death of the Florida real property owner. Florida defines homestead as one’s principal place of residence up to one-half acre within a municipality and up to 160 contiguous acres in any county in Florida. See Florida Statute Sections 222.01 and 222.05.