Articles Posted in Asset Protection

Image of family members who run a florist business

Partners pay tax on income earned even if it is not paid out to them

The taxation of Family Limited Partnerships should be carefully considered in advance of setting up and rolling out your new FLP.

FAMILY LIMITED PARTNERSHIP DEFINED

State laws have provisions allowing people to establish limited partnerships.  Limited partnerships provide limited liability protection for the limited partners similar to the liability protection afforded corporation shareholders.  The limited partnership is established by filing a form in the state in which it is being established and by the preparation of a limited partnership agreement which governs the ownership income and management of the partnership. The limited partnership agreement is custom prepared by the attorney forming the limited partnership and can have many variable aspects that need to be considered as part of the formation process.

A family limited partnership is legally no different from any other limited partnership except that it’s only members are family members. The term “family limited partnership” is something commonly used in the estate planning and asset protection field. A family limited partnership will have one or more general partners and one or more limited partners. Their respective roles are defined in the chart below:

Purposes of Family Limited Partnerships

Image of umbrella over house, care and stack of coinsPeople form family limited partnerships (FLP’s) to (i) transfer ownership of properties or assets to family members while still maintaining control; (ii) to save on estate and gift taxes; (iv) to shift income from parents’ higher tax brackets to children’s lower tax brackets; (iii) to provide some asset protection against liabilities of the property or assets put into the limited partnership or (iv) to provide asset protection against creditors of the limited partners.

Typical example-an apartment building

A mom and dad own a 10 unit apartment building which is paid for and provides substantial cash flow income.  They have 3 children and 1 of the children is heavily in debt and cannot handle money.  They transfer the apartments into a FLP and the FLP agreement provides that the parents own 40% of the assets and income and the children own 60%.  It is set up so that payment of income is discretionary with the parents who are the general partners.  The FLP prevents any creditors of the building from going after the parents’ or the childrens’ individual assets outside of the FLP.

The FLP prevents any of the childrens’ creditors from forcing a payment of income to pay the children’s debts.  The parents essentially still control the money flow and manage the property. There are many variations possible to this so the entire financial and legal picture needs to be gone into before jumping into any FLP.

Don’t wait until you get sued to do asset protection

Danger of moving assets illegally – Law Against Fraudulent Conveyances

DANGERS OF OWNING ASSETS IN YOUR OWN NAME

Image of asset protectionIf you lose a lawsuit that has been filed against you personally then the winning party obtains a court judgment.  That judgment is then enforceable against any accounts or property owned in your name.  Also, the judgment is enforceable against whomever you transferred the accounts of property to if the transfer was a gift or a sale for less than fair market value.

DON’T WAIT UNTIL YOU ARE SUED TO PLAN

You can be sued under the law against fraudulent conveyance for improper transfers.  Also, whomever you have transferred money or property to can be sued to make that asset transferred available to the creditor. Any transfer of money or property out of your own name and into an entity needs to have a legitimate business purpose.  Protection from personal liability is such a purpose. 

However, any transfers with intent to hinder, delay or defraud a creditor may be set aside under the law against fraudulent conveyances. Also, transfers without receiving equivalent value and which render you insolvent or put you in the position of being unable to pay your debts would also violate the law.  Thus, if you have been sued or are facing a definite liability or claim, it may be too late to make asset protection transfers.  The time to do transfers is BEFORE you have any significant claims or lawsuits.

Get your assets out of your personal name AND get your name off of public records associated with the asset.

DANGERS OF OWNING ASSETS IN YOUR OWN NAME

If you lose a lawsuit that has been filed against you personally then the winning party obtains a court judgment.  That judgment is then enforceable against any accounts or property owned in your name.

ASSET PROTECTION STAGE 1

Asset Protection – Stage 2The most common asset protection plan is to form a corporation to conduct a business enterprise. If the corporation is properly maintained, the debts and liabilities of the Corporation are not passed through to the shareholders.  In other words, the corporation’s owners (shareholders) are not personally responsible for the corporation’s liabilities.  Only the actual money invested by the shareholders in the corporation is at risk and liable to pay the corporation’s debts.

DOWNSIDE OF STAGE 1

If you own a corporation or an LLC you do get some asset protection but your corporation or LLC will be filing a statement of information with the names of the officers and directors which typically are the owners.  A creditor with a judgment may then try to bring proceedings against you personally or against your property or accounts and you would incur legal expenses to fight that.

Get your assets out of your personal name

DANGERS OF OWNING ASSETS IN YOUR OWN NAME

Image of a home inside of a safeIf you lose a lawsuit that has been filed against you personally then the winning party obtains a court judgment.  That judgment is then enforceable against any accounts or property owned in your name.  Thus, if you operate a business in your individual name (instead of the business being operated in the form of a corporation) and if you lose a lawsuit against that business then the judgment is enforceable not only against the business assets but also against your home and take accounts in your name personally.

WHAT IS ASSET PROTECTION?

A better term for this is asset preservation planning. It’s not what you actually own but what you control which is important. The law allows you to build up a defense against liabilities and lawsuits that could occur in the future. The law allows you to limit your risk in various situations. The most common asset protection plan is to form a corporation to conduct a business enterprise. If the corporation is properly maintained, the debts and liabilities of the Corporation are not passed through to the shareholders.  In other words, the corporation’s owners (shareholders) are not personally responsible for the corporation’s liabilities.  Only the actual money invested by the shareholders in the corporation is at risk and liable to pay the corporation’s debts.

STAGE 1 PROTECTION

Instead of owning the money and assets in your own name you instead own shares of stock in a corporation or LLC or other interests.  To accomplish that your form one or more legal entities under California law such as a corporation, limited liability company, family limited partnership or permanent trust.  Transfer into the entities the business assets, or professional practice assets, or real estate assets which may incur debts, claims and lawsuits. Open bank and securities accounts in the name of the entity.  Each entity should stand on its own and have separate accounting records, its own tax id# and file its own income tax returns.  These steps are all normal business practices followed by nearly all ongoing business enterprises.

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