Estate planning involves the facilitation of postmortem asset transfers, but this is not the only consideration. Asset protection should also be a priority so you can preserve what you have earned.
With this in mind, if you own a small business as a sole proprietor, your personal property would not be protected if the business is sued. This is an unnecessary risk because there are relatively simple asset protection solutions that can be implemented.
Limited Liability Company (LLC)
A limited liability company can be established as an asset protection structure. When your business is classified as an LLC, your personal property would be protected if a legal action is initiated against the business.
This is a general rule of thumb, but there is an exception if you personally and directly cause damages while you are working for the limited liability company. Under these circumstances, your property may not be protected.
If a business is sued by creditors or some other plaintiff, your personal property would be protected. However, a court can issue a charging order that would attach payments that the LLC would be making to you.
Some people do not want to get away from the sole proprietorship because they like the simplified tax structure. You claim profits or losses on your personal income tax returns, and this is called pass-through taxation.
Nothing changes in this regard if you have an LLC because the pass-through taxation applies to limited liability companies as well.
Family Limited Partnership (FLP)
Another asset protection structure that can be effective for professionals, businesspeople, and real estate investors is the family limited partnership. The partnership is comprised of the general partner that makes the decisions, and there are silent limited partners.
To explain the value using a simple example, let’s say you own an apartment building as a source of rental income. You can transfer ownership to a family limited partnership. The brewpub that you operate as your primary endeavor can be held by a different family limited partnership.
If there is an injury accident in the apartment building, the plaintiff would be suing the family limited partnership that owns the apartment building. Meanwhile, the brewpub would be protected.
The personal property that is owned by all the partners would also be protected. If any partner is sued, the brewpub and the apartment building would be protected.
In addition to the asset protection, family limited partnerships facilitate tax efficient transfers for people who are concerned about estate taxes.
Succession Planning for Business Partners
You can use a buy-sell agreement as the foundation of your business succession plan, and this can involve the use of life insurance. If you execute the cross-purchase plan, all the partners would agree on the value of a share in the business.
They would take out insurance policies on one another that are equal to the value of a share. When a partner dies, the proceeds would be collected, and the money would be used to buy the deceased partner’s share from their estate.
This is an estate planning scenario, but these agreements can facilitate exits for retirement or any other reason, and the funding can come from another source.
Schedule a Consultation Today!
If you are ready to work with a Glastonbury or Westport, CT estate planning attorney to put a plan in place, we are here to help. When you choose our firm, you will feel comfortable from the start, and we will work with you to develop a custom crafted plan that ideally suits your needs.
You can schedule a consultation appointment right now if you call us at 860-548-1000, and you can use our contact form if you would rather send us a message.
