FAMILY LIMITED PARTNERSHIPS 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.