Who Is Eligible for Exemptions

April 13, 2006

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In order to understand exempt asset status, a small business owner must keep in mind that asset exemptions are available only to "natural persons" (i.e., real human beings). Corporations, LLCs and even partnerships are considered "persons" for many purposes in the law, but not for asset exemption purposes.

Asset exemptions were designed to ensure that families could emerge from a financial crisis with the ability to provide for their basic necessities, such as food, shelter and clothing. Artificial entities have no such needs and, accordingly, cannot use the asset exemptions.

Of course, this conclusion is lacking a certain logic. Small business owners do in fact rely on their business's assets to provide for their family's basic necessities. Nevertheless, the law in many cases seems to defy logic, as illustrated below.

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In a recent Texas case, a family claimed that the Texas homestead exemption protected their family farm, which consisted of their home and several large tracts of land. Texas provides an unlimited homestead exemption.

The family had previously transferred ownership of the farm to a family limited partnership as an estate planning device.

The creditor produced copies of the deeds proving the limited partnership, and not the family members, owned the farm. Accordingly, even though the farm was the family's home, the court ruled that the homestead exemption, which otherwise would have protected the farm, was not available. Instead, the interest in the limited partnership was an item of personal property, which would have to be protected as such, subject to the less generous exemptions available for interests in personal property.