How Not To Protect Your Personal Assests From Lawsuits
By Cliff Ennico
www.creators.com
"I am just beginning to recover from very near destitution after my wife's serious health problems and her death. I will finally be getting some money soon and I'm planning to buy a Wyoming shelf corporation under which I will run a Web-based retail business. During the past few years I have read books, listened to CD's and watched DVD's about corporations and revocable living trusts.
I was unaware of the possibility of being personally liable while working for my corporation. It is my understanding that if my corporation owns my house that all the expenses are tax deductible, such as lights, telephone, heating and cooling. And the same is true of my automobile. If my trust (not formed yet) owns my car and I use it exclusively for business and I have an accident in which I am charged with negligence, can my trust be sued?"
E-mail messages like this always make me wonder what kinds of books are out there that people are reading. While this reader was obviously distracted by personal tragedy, he has picked up a lot of misinformation that will need to be straightened out, so here goes.
A "revocable living trust" does not protect your assets from lawsuits. It is merely a device to avoid probate. When you die, any assets put in the trust bypass your will and go directly to the trust beneficiaries (your children or other relatives) without going through the long and stressful probate process.
Since you are usually the "trustee" of the living trust as long as you live, and have considerable control over the trust assets, the trust will not be considered a separate entity for purposes of lawsuits. Anyone suing you will be able to reach the trust assets. The only way to avoid that is to have someone else - someone totally independent from you and your family, such as the trust department of a local bank - act as the trustee of the trust. While that will protect the trust assets from legal liability, it also means that the trustee, not you, decides what to do with the assets as long as you’re living.
Now let’s talk about that Wyoming corporation. Unless you are a resident of Wyoming and will be conducting your business there, a Wyoming corporation does you absolutely no good. You will have to register the Wyoming corporation as a "foreign" corporation in your home state, and will have to register for state and local taxes there. You do not avoid those by incorporating in Wyoming or anywhere else. Your corporation or LLC should be formed in the state where you reside and do business. Period.
Putting assets into a corporation which you control will not protect them from lawsuits. While the assets belong to the corporation, your shares in the corporation are still a personal asset and can be seized by your creditors. Attaching shares of stock in a lawsuit is usually a lot easier than putting a lien on real estate, so by doing this you are actually making it easier for your creditors to get hold of those assets.
Also, putting real estate in a corporation, especially a regular or "C" corporation, is a very bad idea tax-wise. Talk to your accountant or tax advisor about that.
Having your corporation lease a car to you gives you some tax benefits, but it does not protect you from liability if you are involved in a traffic accident. The injured person is legally entitled to sue not only your corporation, as the owner of the vehicle, but you personally, because you were the driver whose negligence caused the accident. Even with a corporation, you will need auto insurance on you personally, although the corporation may be able to pay the premiums and take a deduction if you are a W-2 employee of the corporation. Ask your accountant or tax advisor about that.
So what can you do to protect your personal assets from legal liability? Here are some suggestions to discuss with your attorney and/or accountant:
form a corporation or LLC in your home state (not Wyoming), and make sure you use it when conducting business online - that should protect your personal assets against lawsuits without your having to set up a separate trust;
consider transferring title to your house and other key assets to a friendly relative (such as your mother), but be sure that person changes his or her will so that you get those assets back if he or she dies prematurely - also be sure to have a written lease with that person allowing you to live in the house rent-free (or One Dollar a year) until you die; and
if you are working out of your home, consider taking the "home office deduction" on your tax return - you may find that will give you better tax benefits than forming a corporation and "living through the company".
Cliff Ennico (
crennico@gmail.com
) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2010 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS.COM. Permission Granted for use on Dr.Laura.com.
