Keep Personal Exemptions Personal

April 13, 2006

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As a general rule of asset exemption planning, a home should never be transferred to a business entity, such as a limited partnership, LLC or corporation, because usually the homestead exemption offers one of the more important and useful asset exemptions. This rule, of course, does not apply to a commercial building.

In contrast, if you transfer your home to a revocable living trust, you should not face this problem. Such transfers are common estate planning tools where the goal is to avoid probate court or federal estate taxes (see our discussion of trusts).

Warning

On the surface, the availability of asset exemptions only to natural persons may seem to be an argument in favor of operating a business in the form of a sole proprietorship (if there is one owner), since the sole proprietor is automatically deemed to be the personal owner of all the business's assets. It also may seem to be an argument in favor of the owner personally owning and leasing all of the assets to the business.

Either of these approaches, however, would be a mistake. The sole proprietor has unlimited, personal liability for all of the business's debts. This one fact makes the sole proprietorship untenable as a form in which to operate a business with maximum levels of asset protection planning.