While a properly documented and run corporation
may insulate one from direct liability, a judgment
creditor, by taking over a controlling shareholder's
stock, may force the sale of the corporate assets, or
take other heavy handed actions. A general partnership
offers no asset protection as all partners are
permitted to control all assets. However, the limited
partnership is a hybrid of unique character. As most
limited partnership abuses have occurred in the past in
the public offering stage of a public investment
partnership's creation, the only real body of law
regarding "partner's rights" involve the offer itself.
The Securities and Exchange Commission and local state
agencies have large staffs fully ready to investigate
and punish wicked promoters who fleece innocent
investor's of their invested dollars. Once you are
validly admitted to the partnership as a limited
partner your sole voice in the partnership is through
the paltry rights written into the Articles of Limited
Partnership. While your attorney or advisor would
normally review the Articles to assure that you have,
in common with a majority of other limited partners,
basic rights as to the general direction of the
partnership, and that the General Partner has a clearly
defined scope of authority to mange a specific type of
business, there is no provision of the Revised Uniform
Limited Partnership Act that keeps the Articles from
greatly diminishing these "shareholder rights." Thus
is born the Family Limited Partnership (the "FLP").
The FLP usually has as its General Partner (the
"GP") either a corporation or the person whose assets
are being protected. As the General Partner makes all
decisions regarding partnership business and
assets,this keeps control with this person even if it
is decided to put a majority of "ownership" in the name
of other limited partners, such as the spouse or
children. If a doctor became the GP of a FLP with
1.00% interest, and kept a 15.00% interest as a limited
partner, with family members owning the other 84.00%,
the Articles could require an 85.00% vote prior to any
combination of partners being able to force the GP to
either distribute partnership assets or resign his sole
authority. As the liberal gifting provisions of the
estate/gift tax rules permit substantial transfers over
time from one generation to the next, it is possible by
using the FLP to give to one's children almost the
entire estate while retaining 100% control over it
until one's death! Thus the FLP has uses outside of
lawsuit and asset protection.
Into The Valley of Death Went The Charging Order
Assume that as part of a valid estate plan a
business owner has taken the following course of
action. He and his wife have executed joint wills that
recognize their fully funded living trusts. The trusts
have organized the ownership of the assets so that upon
his death his estate has no significant assets to
probate. The assets of the trusts are primarily family
limited partnerships. Over a period of years enough of
his assets have been gifted to the children and
grandchildren that the value of the estate that will go
to the spouse will be less than the amount that would
subject it to estate taxes. He has provided that the
spouse will become the successor trustee of the trusts
and General Partner of the Family Limited Partnerships,
thus retaining control for her until her death.
However, while he is alive a financial calamity befalls
him through a lawsuit, trial and judgment. If he was
not protected it could wipe him out. However, upon
post trial discovery the judgment lien holder
ascertains that the bulk of his assets have been
encapsulated by the family limited partnerships. To
reach a partner's interest in a limited partnership a
creditor has sole use of a legal device called a
"Charging Order."
The charging order must follow a very different
set of rules than apply to court ordered sales of other
personal property. A charging order against a limited
partner's interest in a partnership merely gives the
creditor the right to receive such partner's share of
partnership distributions but gives it no right to vote
for them or require a BP to exercise his discretion to
distribute them. In effect, a creditor with a charging
order becomes an assignee of the limited partner's
interest and not,in fact, a limited partner.
Accordingly, the IRS has held that an assignee of a
limited partnership interest must be liable for any
taxes applicable to that interest's K-1 tax return.
(K-1 is the return filed by a partnership, showing the
shares of each partner. The partnership itself does not
pay the taxes -- each partner is responsible for paying
his share.) Thus the creditor, having started down the
valley of the charging order finds that he can get no
money and must even pay tax on partnership profits
applicable to his debtor! The partnership might even
deliberately increase taxable earnings in those years.
A prudent lawyer would not permit his client to find
himself in that position.
If you have any dangerous assets such as rental
properties or businesses with employees, they should be
out in their own limited partnerships. A corporation
should be the general partner of them. Safe assets,
such as bank accounts, stock, jewelry, personal
property other than vehicles, can be put in a
partnership with the individual as general partner.
