The following are some general questions that often get asked to various Legally Mine representatives. Many of these questions and answers both are found in the book the Asset Protection Bible.
I will continue with this for a couple of posts, but please let me know if you have any questions that are not listed –
Thanks, Matt – Legally Mine
1. What makes a Family Limited Partnership (FLP) different than other forms of ownership?
The general rule in asset protection is that almost anything that is owned in your name could potentially be seized in a lawsuit; an interest in a FLP, however, cannot be taken away. Let’s give a very simplistic example. You have 3 assets to your entire estate: 10,000 shares of IBM Stock, a new 2005 Porsche, and an interest in a million-dollar FLP. In a devastating lawsuit, the shares of stock and the Porsche could be seized to satisfy a judgment, but the interest in the FLP cannot be taken. According to the laws of the Revised Uniform Limited Partnership Act, a judgment creditor may not seize the assets of the partnership, nor can he take away your interest in the partnership. The major remedy that a judgment creditor of a Limited Partnership can get is a charging order against that partner’s interest.
2. What is the charging order of a Family Limited Partnership?
A charging order gives the creditor no rights to control or attack the assets of the partnership, but only allows the creditor the right to receive the partner’s income distributions. Because family members control most FLPs, the general partner will usually cease or alter distributions of partnership income, resulting in no money being distributed to the creditor. Because of IRS ruling 77-137, the creditor is still responsible for all the taxes the partner would have owed, even if he does not receive a distribution. This renders the charging order sufficiently unattractive so that, as a practical matter, individual judgment creditors often avoid even trying to pursue assets protected in a Limited Partnership.
3. Has a Family Limited Partnership ever been broken?
According to several tax attorneys who have done extensive research in this area, there is no appellate case in America where a Family Limited Partnership has ever been broken. There are some lower cases where they have been, but they have been later reversed on appeal. Therefore, as far as we know, there has never been any Supreme Court case or any other appellate case that takes the assets outside of a Limited Partnership. In fact, one of the inherent statutory advantages of a Limited Partnership is that a creditor who has not sued the Limited Partnership directly may not seize assets of the partnership. The creditor is restricted to the charging order, which means the creditor’s only recoverable interest is an attachment of the income distributed from the partnership- not the assets or the interest of the partnership.
4. Can I be sued if I am an employee?
Often, employees have a false sense of security and feel that they are exempt from a lawsuit while working under the umbrella of someone else’s business. Employees, however, are always subject to lawsuits for the work they do within the course of their employment. Sometimes the lawsuits exceed the scope of the employment and the employees are held personally liable. Sometimes the damages exceed the insurance coverage and the employees are also named in the lawsuit. And sometimes an employer can claim that the employee was outside the scope of his employment and is not covered by the protection of the business, especially in cases of alleged sexual harassment and discrimination. Advanced asset planning is not only wise for the employer, but also wise for employees.
5. What income tax advantages are there for having a Family Limited Partnership?
With income tax law, there are two major ways to reduce taxes: increase your deductions and spread income. The Family Limited Partnership has the ability to spread income from the parents to grandparents, siblings, or children, who may be in lower tax brackets, without losing control of the assets. Hence, the major tax advantages lie in the ability to have the income from the partnership taxed in the lower tax brackets of multiple family members, thereby reducing the overall taxes due.
6. Are general partners more liable than limited partners when sued?
A general partner in a Family Limited Partnership is always held more liable than the limited partners. That is the basic premise that gives such great protection to the limited partners; they are not liable for the acts of the partnership! A general partner is generally held to be personally liable in an action against the Limited Partnership. To provide the greatest protection, many general partners will keep their personal assets in other Limited Partnerships. Another approach frequently used to minimize the liability exposure is to have the general partner be a Corporation or a Limited Liability Company.