Asset Strategies

Learn more about protecting your personal and company assets.

Shield Assets Using Wildcard and Wages Exemptions

When developing an asset protection strategy, you want to know and use state and federal laws that exempt certain assets from the reach of creditors. Of the exemption options that may be available to you, only the wild card exemption can be used to protect various types of personal property. Another important exemptions is that for wages. A small business owner needs to consider how to use this exemption in their asset protection planning.

Many states offer the wild card exemption that can be applied--at your discretion-- to protect a wide variety of personal property.  In many cases, a wildcard exemption can be used to protect an ownership interest in a business. (See the exemptions list for specific state wild card exemptions).

In most states, the wild card exemption is a small, specific dollar amount, averaging around $1,000, although some states (such as Texas) have very generous amounts. Some states also allow some or all of an unused homestead exemption to be used as a wild card. The federal bankruptcy code adopts both of these approaches.

Using the Wild Card Exemption To Protect Your Business

A wild card exemption may be the most effective way, or the only way, from an exemption viewpoint, to protect an ownership interest in a business, which is considered an item of personal property.

Because of the limited dollar value of the wild card exemption, however, the best approach to protecting the ownership interest in a business is the strategy of using separate operating and holding companies, forming the business as an limited liability company (LLC), and then minimizing the amount of vulnerable capital within the operating entity through: a strategic initial investment, leases of assets to the business, a practice of regular withdrawals from the business, and liens on the business's assets in favor of the owner in exchange for extensions of credit from the owner.

These practices will shield the business's assets, and the owner's personal assets, from the claims of the business's creditors. In addition, the use of an LLC will offer the greatest possible protection for the owner's interest in the business from the claims of the owner's personal creditors.

In addition, another estate planning strategy involves creating the business as an LLC, and then conveying nonvoting ownership interests to family members (i.e., children), either outright or in trust.

However, this strategy also has significant advantages in terms of exemption planning. As discussed above, the wild card exemptions available for general items of personal property are usually quite limited. By conveying ownership interests in this manner, you will retain complete control of the business, but at the same time reduce the monetary value of your particular ownership interest to a level that is likely to fit within the wild card exemption.

At any rate, you should examine the wild card exemption available in your state, and the analogous federal exemption if your state has not opted out of the federal exemptions, and consider the extent to which it would protect your personal property, including your interest in the business.

Proceeds From Conversion of Exempt Assets May Be Exempt

Asset exemption planning involves converting nonexempt assets into exempt assets. While its inadvisable to ever convert exempt assets into non-exempt one, in reality it will sometimes be inevitable. For example, life insurance will be converted to cash upon the death of the insured. Exempt wages will be received, and become simply "cash," a nonexempt asset. In each of these cases, what was once an exempt asset loses its exempt status.

Ideally, when this happens, a plan will be in place to apply the cash proceeds to an exemption (e.g., by paying down a mortgage on a home with an unlimited homestead exemption, by making a contribution to a retirement plan, by making a gift in return for a private annuity, etc.).

Many states provide that the proceeds from certain exempt assets are, in turn, exempt for a certain period of time. The exemption for the proceeds from the conversion of exempt assets applies only to certain listed exempt assets--usually life insurance (subject to restrictions). the homestead and earned but unpaid wages.

The exemption is relatively short-lived, typically being in a range of two to 18 months. For example, in Idaho, sales proceeds from an exempt homestead are exempt for six months, while the period is one year in Illinois.

For homestead proceeds that are reinvested in a new homestead, federal bankruptcy law states the equity must have been acquired at least 1,215 days before a bankruptcy filing for the proceeds to be considered exempt.

The exception here is life insurance proceeds, which, subject to certain restrictions, are simply exempt in many states regardless of the time that elapses, or the number of times that the proceeds are re-invested into different forms.

In every case involving exempt proceeds, it is important to be able to trace and separately identify the proceeds, in whatever form they exist in the future. Records should be established that detail the trail of the proceeds. They should be retained, along with copies of supporting documentation, for at least the life of the new exemption or, in the absence of a fixed expiration period, indefinitely.

Of the many asset exemption options available, the exemption for wages is likely to be the primary source of continuing income during a state court or federal bankruptcy proceeding.

Typically, states exempt 75 percent of the debtor's disposable income from the reach of creditors. In other words, a judgment creditor can only attach 25 percent of your disposable income, which is defined as gross wages less amounts required by law to be withheld, including federal income and Social Security taxes.

Federal law imposes on each state this same 25-percent restriction on wage attachment. This federal law preempts or overrules state laws. In addition, federal law provides for a minimum wage exemption, which is equal to 30 times the current federal hourly minimum wage. With a federal minimum wage of $7.25, this means that at least the first $217. of weekly wages is exempt ($7.25 x 30). In the case of a wage attachment for child support or alimony, the restriction on wage attachment is increased to 50 percent.

It can't be emphasized enough that states vary widely (and wildly) in what assets are exempt from your creditors. It is essential that you understand the laws of your state and divide your assets in such as way to maximize your protection. (See the exemption list for state specific information on wage exemption.)

Work Smart

The exemption statutes of Florida demonstrate how some states offer significant protections, not available under federal law. In Florida, 75 percent of wages are exempt (as required by federal law) However, if you are the "head of a household," all your wages are exempt. Even if the head of a family voluntarily agrees to a wage attachment, the first $500 of weekly disposable earnings is still exempt.

Small Business Owners Should Ensure Their Income is Exempt as "Wages"

The definition of wages is narrow. In most states, the term means compensation paid or payable, in money of a sum certain, for personal services or labor, whether denominated as wages, salary, commission, or bonus. Earnings from a business do not fit within these categories. Thus, a small business owner must take steps to must ensure that earnings from the business will constitute exempt "wages."


Sole proprietors will not be able to shield income by paying "wages" to themselves. 

This alone is a reason to consider incorporating or forming an LLC so that you can pay yourself "wages."

Typically, owners of a regular C corporation draw a salary from the business. This salary clearly falls within the definition of wages. However, this is usually not the case with other business forms. This is a mistake: you should always take an authorized and regularly scheduled salary from your business. This should be documented in a formal manner.

The failure to take a salary will likely mean the earnings from the business will not qualify for any wage exemption. The definition of exempt "earnings" excludes a business owner's share of earnings in a limited liability company (LLC), subchapter S corporation, or partnership, when the business owners merely divide up the net income of the business. Taking a salary solves this problem.

A salary is also an important way of withdrawing vulnerable funds from the business entity, thereby reducing the amount that a business creditor can seize from your business. This is another example of a multi-layered approach to asset protection.

Wage Exemptions in Bankruptcy Actions

The wage exemption available is affected by the type of bankruptcy filing you choose. In a Chapter 7 bankruptcy proceeding, generally only assets owned at the start of the case are included in the bankruptcy estate. Thus, the debtor retains wages earned during the proceeding, in their entirety. This is one of the many reasons that debtors typically file in Chapter 7. Wages earned prior to the proceeding, but unpaid, can be exempted only if the state's exemptions are claimed. In a Chapter 13 proceeding, the debtor commits all disposable income, after accounting for reasonable living expenses, to paying off creditors over a three- or five-year period. The difference between the treatment of wages earned during the proceeding will usually, but not always, make Chapter 7 a better choice than Chapter 13.

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