Updated: Oct 14, 2020
The primary goal of a little-known entity, The Family Limited Partnership (FLP), is to make yourself judgment proof against frivolous lawsuits while allowing you to utilize your assets to their fullest extent.
The creation of the (FLP) protects you from judgment creditors, as assignees of the debtor’s interest, they cannot vote to direct the activities of the partnership. Without this ability, they cannot disburse partnership assets to satisfy their claims. The key to hampering creditor’s action is the vote!
Judgment creditors can attach a limited partner’s interest in the partnership and receive any disbursement made to that particular limited partner. However, if the partners decide not to make any disbursements, creditors receive absolutely nothing.
The partnership may make loans to individual limited partners without making distributions or withdrawals. These loans are very difficult to attach. The partnership may decide to pay wages to the limited partner. If judgment creditors attach the limited partner’s wages, there are severe limitations on the amounts they can take.
Eliminating or Reducing the Cost of Personal Liability Insurance
By properly protecting your assets from creditor’s claims, you can effectively reduce the cost of personal liability insurance. You can reduce expenses for personal liability insurance substantially or eliminate them entirely when your assets are adequately protected.
Stumbling Blocks of Creditors
The net effect of having your assets protected is to eliminate or reduce your exposure. This is a valuable bargaining chip if you do decide to negotiate claims.
A creditor attempting to go after a limited partner is in a dilemma. The creditor will have to decide whether to expend additional time and money overcoming many formidable obstacles:
More often than not, the creditor ends up with a charging order against the interest of the limited partner that can generally be discharged or settled for an inconsequential sum.
The charging order entitles the creditor to income or assets only when they are distributed. Even if income is not distributed out of the partnership, the creditor is still taxed on it because the creditor is named on the K-1 (partnership tax return). Since the creditor cannot force the distribution of assets or income, the creditor may suffer paying taxes on his or her share of partnership income that has not been received.
Negotiating a Settlement
Once the creditors understand their position, they will probably want to settle their claims as soon as possible. Your goal is to wait. If you decide to settle, use the strategies in my Stop Lawsuits Cold CD/ Workbook to learn how to settle for pennies on the dollar.
Family Limited Partnership vs. Other Entities
The most significant advantage an FLP has over a revocable living trust and other entities is that assets are protected from creditor claims. This is not the case in a revocable living trust. Anyone with a legal claim can effectively satisfy that claim by penetrating the revocable trust and removing its assets. In an FLP, this cannot be done because you control the vote. In addition to asset protection, the FLP can be used as part of your estate plan to avoid probate and estate taxes in the same manner as a revocable living trust.
Other entitles, such as corporations and trusts are costly and time consuming. A wrong move can expose your estate to the whims of creditors. Professional fees could add up to more than the value of the assets. Putting aside all these headaches, these other entities still do not come close to offering the protection of a family limited partnership.
ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and apartment investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To purchase the Stop Lawsuits Cold CD/ Workbook and to learn more about the Center for Real Estate Studies, please visit our web site at # http://www.calstatecompanies.com