Overview of Why Corporations Should Not Shelter Personal Assets
We, so far, discussed inside-out protection or the personal asset protection
that a corporation can provide you from the debts of the company. Now
let's return to a corporation to safeguard your personal assets. This
is outside-in protection. For a corporation to give you outside-in protection,
you must transfer your personal wealth to the corporation. You then no
longer personally own your boat, car, paintings and so forth; your corporation
does. Your personal creditor cannot directly claim assets owned by the
corporation. However, your personal creditors could seize your corporate
shares. That's the problem. Your ownership interest in the corporation
can be claimed by your creditor. If you own a controlling share, your
creditor could control your corporation's assets. That's why you
can never safely use the corporation alone to protect your personal assets.
You must use the corporation with other asset protection tools, although
a corporation might provide temporary shelter for your personal assets.
To protectively title your corporate shares, you have several options:
— Married? Transfer most or all of the corporate shares to your less vulnerable
spouse, who would then control the corporation. One problem, of course,
is that you no longer control the corporation. Use this arrangement only
if it meets your personal, estate planning and divorce-proofing objectives.
— Title the shares to a family limited partnership (FLP): Spouses may
become the general partners and control the partnership assets. They may
be the limited partners or appoint other beneficiaries — such as
children, friends, charities, etc. — as limited partners. As general
partners, the spouses control the partnership that owns the corporation,
which in turn owns the assets. Indirectly, the spouses control the assets,
but do not personally own the assets or the shares of the corporation
that owns the assets. The assets now owned by the corporation cannot be
claimed by the couples' personal creditors " assuming the asset
transfer to the corporation was not fraudulent.
— Transfer the corporate shares to an irrevocable trust for your children
or other beneficiaries. The husband and wife may become the co-trustees
of the trust and manage the trust that controls the corporation. The couple
thus indirectly controls the corporate assets without directly owning
the corporate shares.
— Title the shares to an LLC. As with a limited partnership, an LLC member's
personal creditors cannot seize a debtor's membership interest in
the LLC. Beware of the fraudulent transfer laws if you have creditors.
— Title the shares to an international trust or foreign LLC. Both international
trusts and a foreign LLC can protect corporate shares. Combine international
trusts with limited partnerships as the corporate shareholder substantially
strengthens the arrangement. Titling shares of a U.S.-based corporation
to an international entity also privatizes its ownership. However, a U.S.
judge can force you to surrender shares fraudulently transferred internationally.
Therefore, we do not recommend this when you have existing creditors.
— Title your shares as tenants-by-the-entirety. If you co-own your shares
with your spouse in a state whose tenancy-by-the-entirety laws protect
stock ownership, it may give adequate protection when only one spouse
Each strategy is more fully explained in our website, but for the moment,
understand that for a corporation to protect your personal assets, you
cannot directly own the corporate shares. You must layer your protection
with trusts, limited partnerships or other protective entities to own
the corporate shares.
When outside-in protection is your goal, you need a passive personal corporation.
Corporations that engage in business incur liabilities. You would then
risk losing personal assets owned by the corporation to the businesses
creditors. Another danger is that corporations used primarily to hold
personal assets can create serious holding corporation tax problems. C
corporations are subject to double taxation. While S corporations are
singly taxed, they cannot be owned by a trust, partnership or other protective
entity. The IRS heavily taxes passive income of personal holding corporations.
Still, another problem with a corporation to hold personal assets is that
if you contribute personal assets to a corporation and later wish to re-claim
the asset, you may have to pay taxes on the returned capital. Redistributing
partnership or LLC assets (where the LLC has not elected corporate tax
treatment), however, does not usually trigger a tax. So, there are tax
traps. Before you use a corporation for outside-in protection, review
it carefully with your accountant for the tax consequences. Avoid these
tax problems. Use limited partnerships, limited liability companies and
other entities. They can better protect your personal assets.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to