D. Asset Protection by Incorporation

Where assets are held in real estate, or other income-producing ventures, small or family businesses (limited partnerships, LLC’s or S-Corps) may be appropriate. By creating a business entity, you can provide a strong layer of protection between possible creditors and your own personal assets. Partnerships, LLC’s and S-Corps are “pass-through” entities for tax purposes, so no additional taxes are paid at the business level—it is all “passed through” to the owners, and taxed at their individual rates.

A big difference between businesses and trusts is that your own assets are protectable for yourself; however, a business does not incorporate all of your assets—only those for which there is some legitimate business need, and only from creditors relating to the business (for instance, tenants of your rental property). So an LLC will not protect your personal bank accounts or retirement assets from creditors.

Family businesses also provide centralized management by identifying one or more members to oversee and handle the property or business. This is helpful if certain family members are unavailable for decision making, do not have the proper management skills, or simply do not want to participate in management.

Another benefit of small family businesses is the ability to shift assets of high net worth estates to younger generations without getting hit with estate taxes, by use of valuation discounts.

The caveat here is that there are administrative costs associated with running a business, including filing fees and separate accounting costs. Moreover, the business must be properly managed, or it will be disregarded for liability purposes. So whether a business is appropriate, and which form of business is appropriate for you, is determined on a case-by-case basis. Often a family or solely-owned small businesses works best as a component of overall estate planning in connection with other vehicles and methods, such as revocable trusts, grantor trusts, and/or irrevocable trusts for your children.