          
          
          
                               Partnerships
          
          
               Another income producing-asset protection plan
          which has had some acceptance in the United States is
          the so-called "family limited partnership" which sounds
          appealing but is hardly without legal and tax problems. 
          Recent U.S. court decisions have called into question
          some fundamental advantages of the family limited
          partnership including its greatest attraction,
          insulation of partnership property from an individual
          partner's personal creditors.
          
               It is understandable that a legal arrangement
          built on family economic interests would be popular in
          the United States where much of the country's wealth is
          held in millions of family businesses.  One estimate
          holds that family business accounts for more than half
          the gross domestic product and provides about half the
          nation's jobs.  Oddly enough, only three out of ten
          family businesses survive into the second generation,
          one in ten last to the third generation and the average
          family enterprise lasts only about twenty-four years. 
          Many of the reasons for the demise of individual family
          businesses are found in family dynamics and psychology
          which overlap problems of both family and business,
          either of which can be daunting on its own.  Active
          family partnerships often mirror all these concerns and
          cease because of them.
          
          
          Partnerships Defined
          
               First we should consider some basic facts about
          partnerships in general.
          
               A "partnership" as defined by the Uniform
          Partnership Act, a variation of which is applicable in
          most states of the U.S., is "an association of two or
          more persons to carry on as co-owners a business for
          profit."  A partnership requires an agreement between
          two or more competent persons to place their cash,
          assets, labor and skills into a business and divide the
          profits and losses, usually in proportion to the degree
          of each of their ownerships.  A partnership is
          recognized for most legal purposes including contracts,
          credit, bankruptcy, incurring debt, marshalling assets,
          and acquiring and transferring property but it does not
          pay tax.
          
          
          General Partnerships
          
               In a "general partnership," which is usually used
          for a commercial business purpose, each general partner
          shares equally in management and control.  Each partner
          is also equally personally liable for partnership debts
          (after partnership assets are exhausted) to the full
          extent of their own personal wealth, this being the
          greatest general partnership disadvantage.  This
          liability is one of the reasons that persons involved
          in partnership businesses often seek asset protection.
          
               There are distinct advantages to being a partner
          in a general partnership.  A general partner shares in
          all profits and since partnerships are not taxed as
          such, avoids the double taxation imposed on corporate
          dividends (corporate income tax plus individual income
          tax).  A general partner can withdraw his full
          contribution without taxation.  Along with other
          general partners he jointly manages and conducts the
          business with complete access to all books and
          financial information and can obtain joint credit with
          other partners.
          
               As noted, each partner can be held personally
          liable for all partnership debts, even those which
          result from one partner's negligent or harmful acts. 
          General partnerships often must be dissolved when one
          partner files personal bankruptcy or dies unless quick
          arrangements are made for a buy out of that partner's
          interest or unless the partnership agreement allows for
          such events.  Usually a deceased's partner's
          partnership interest must go through probate.  Even
          though a partnership is not a taxable entity it must
          file an annual tax return and when one party dies his
          interest is subject to estate and inheritance taxes.
          
               General partnerships are often faced with the
          personal problems inherent in any joint ownership
          arrangement resulting from divorces, inheritance by
          non-members who may be undesirable as partners or the
          sudden death of a partner.  As you can see from this
          discussion, general partnerships do not serve any
          really useful role in personal asset protection.
          
          
          Limited Partnerships
          
               Limited partnerships have been recognized in
          Anglo-American common law and in civil law for
          centuries.  In a U.S. limited partnership the Uniform
          Limited Partnership Act requires there be one managing
          "general partner" (not to be confused with members of a
          general partnership as just described) who is solely
          responsible for management and control of the business. 
          The limited partners must refrain from taking part in
          management lest in the eyes of the law they lose their
          limited status and its considerable benefits.  The
          virtue of a limited partnership lies in the fact that
          limited partners are not individually liable for
          partnership debts beyond the property interest they
          contribute to the partnership.
          
               Another advantage of a limited partnership is that
          a personal creditor of a limited partner cannot attach
          that partner's interest in the partnership.  A creditor
          can only obtain what is known as a "charging order," a
          relatively unattractive remedy in the judgment
          collection process usually requiring the creditor to
          wait for the future distribution of partnership income,
          a totally discretionary act resting with the managing
          partner.
          
               The courts of the State of California, which has
          one of the most liberal partnership laws, have recently
          called into question the near creditor-proof status of
          a limited partner and his partnership assets.  In two
          cases these courts have held that under certain
          circumstances a debtor's partnership interest can be
          foreclosed to honor a judgment, a major departure from
          past holdings and a significant loss of asset
          protection.  These decisions undermine the use of the
          family limited partnership for asset protection
          purposes, although many promoters sell family limited
          partnership packages which they claim are completely
          full proof asset protection devices.
          
          
          "Family Partnerships"
          
               The arrangement known as a "family partnership" is
          created as a means to transfer income and assets from
          the organizer or owner of a business or one who has
          accumulated assets of value to members of his or her
          family in a manner which limits personal and tax
          liability.  It is nothing more than a regular limited
          partnership in which family members rather than non-
          family business associates are the partners.  This
          arrangement comes with all the intra-family problems we
          noted as well as the advantages of close relationships.
          
               Under the law in most states there is a
          requirement that a formal "articles of limited
          partnership" be signed and publicly registered with the
          state as notice of the business scope and the limits of
          partners' liability.  These documents are technical,
          requiring legal and tax advice in order to insure both
          the partners' maximum advantage and that the agreement
          is valid.
          
               The California cases cited may also have a future
          effect on the recent popularity of family partnerships
          as asset protection vehicles.  The principal reason for
          laws providing partnership interest protection has been
          to prevent the creditors of one limited partner from
          disrupting partnership business continuity and harming
          the other partners by a foreclosure.  If the only
          business of the partnership is the holding of family
          assets, including a personal residence, it may be
          difficult to argue that the family partnership has any
          real business in a commercial sense which will be
          disrupted by the foreclosure or that the business of
          innocent, non-related third parties will be prejudiced.
          
               Family limited partnerships have been under legal
          siege in other important respects as well.
          
               The U.S. Internal Revenue Service, in a series of
          court cases, some appealed to the U.S. Supreme Court,
          has often successfully challenged the validity of both
          limited and family partnerships.  In so doing the
          courts have imposed a series of tests which must be met
          in order to create a valid family (or any) limited
          partnership.  In these tests the courts inquire into
          whether each partner (especially if a minor) has true
          title to and control of his or her interest; regardless
          of statements in the partnership articles, what is the
          true intent and relationship of the parties; what
          actual capital and/or skill does each partner
          contribute; and does each limited partner really
          control the income paid to him and its disposition?
          
               These tests mean a family partnership, like any
          limited partnership, must have partners who actually
          perform important work on a continuing basis and who
          really contribute capital or assets of some tangible
          kind.  The law does allow a limited partner to receive
          his or her partnership interest as a gift but if the
          recipient is a minor, someone other than the donor must
          serve as legal custodian of that interest until he or
          she reaches majority, 18-years-old in most states.  A
          limited partner may also purchase his or her
          partnership interest with payment out of future
          profits.  But there are restrictions on gift and
          purchased limited partnership interests, and most
          courts carefully scrutinize whether the donor actually
          relinquishes control and ownership of the interest and
          gives it over to the donee or purchaser.
          
               As compared to a general partnership, if it is
          properly created and managed, a limited partnership can
          be a valid asset protection arrangement in some
          circumstances.  Although a partnership is usually
          thought of as operating a commercial business
          enterprise it can also be used to control personal
          assets such as a home or other real estate, personal
          property and intangibles such as stocks, bonds and even
          insurance.  
          
               If a large amount of money is involved it is
          better to create more than one limited partnership, one
          of which holds liquid assets such as cash, securities,
          bonds, certificates of deposit, precious metals, life
          insurance policies and negotiable instruments.  The
          other could include assets such as real estate and
          business assets which might be more vulnerable to
          creditor attack.
          
               The managing general partner retains control over
          all the limited partnership assets and the limited
          partners who may be family members cannot and must not
          assert any power in management.  With the caveat
          expressed above concerning new court holdings, family
          partnership assets are generally safe from personal
          creditors of the limited partners and in turn the
          limited partnership's creditors can only attack a
          limited partner to the extent of that partner's actual
          investment and then only with extreme difficulty and
          usually little result.  For example, a partnership can
          accumulate assets but cannot be compelled to distribute
          them to partners thus protecting both the assets and
          the partner from a creditor's charging order. 
          
               If a parent serves as a managing general partner
          with a small ownership interest (say 5%) and his
          children or spouse serve as limited partners with most
          of the ownership divided among them (95%), when the
          managing partner/parent dies, inheritance and estate
          taxes are limited to the deceased's actual partnership
          interest which can be a considerable saving for the
          heirs/limited partners.  There is no bar to managing
          partner contributing the majority of the limited
          partnership's assets and receiving only a small
          percentage ownership interest which gives his creditors
          little to pursue.  Similarly when income is distributed
          in a limited partnership it does not have to be in
          proportion to a partner's investment or degree of
          ownership; it can be in any proportion and family
          members can be given a disproportionately large share. 
          Whatever the income distribution may be, each partner
          is liable for U.S. income taxes as ordinary income.
          
               Keep in mind also that any legal entity can be a
          general or limited partner, a domestic or foreign
          trust, a corporation, estate, custodian of a minor or
          an association.  This means that a managing general
          partner in a limited partnership can incorporate for
          that management purpose, further providing protection
          for his corporate self from creditors and possibly
          higher taxes.  The corporate general partner might have
          a fraction of a percent of ownership interest, but
          provides another layer of insulation from suits for
          acts of the partnership. 
          
               From the foregoing you can properly conclude that
          a family limited partnership has the potential of being
          an excellent vehicle for sheltering both personal and
          family assets from creditors and for reducing estate
          and inheritance taxes.  But these partnerships come at
          a price.  Unless carefully crafted by expensive legal
          experts, American courts are far too eager to use legal
          loopholes to overturn an alleged "partnership."  Even
          more important than the legal crafting of the initial
          documents is the importance that the day-to-day
          partnership operations conform precisely to the legal
          requirements.  Substance is at least as important as
          form, a detail that many family partnership package
          promoters and their clients overlook.  After the fact a
          family may find itself in a situation worse than if
          nothing been done.
          
               While there is a certain flexibility in a family
          partnership for the managing general partner, the donor
          still must deed absolutely his assets to the
          partnership and normally all partners must agree before
          partnership assets can be sold or transferred.  As with
          any partnership, unless the partnership agreement and
          relevant state statutes specifically provide otherwise,
          one partner's death or bankruptcy may force the
          dissolution of the partnership (or a forced buy out) at
          an inopportune time for the sale and distribution of
          assets.  Remember partnership assets are taxed fully as
          part of a deceased partner's estate.  Undistributed
          income may place a partner in a significantly higher
          personal income tax bracket at an unexpected time,
          since partners are taxed on their share whether or not
          the income is distributed.
          
               The value of a family partnership, like any
          investment comes from good management and wise
          decisions.  Forming a family partnership does not
          guarantee income or benefits, nor even asset
          protection.  Ultimately any value for you or your heirs
          will rest not only on a particular legal device but on
          the strength of the national currency in which its
          benefits are paid.
          
               One of the best strategies has been to use a
          Delaware family limited partnership to hold intangible
          assets (such as mutual funds, stock brokerage accounts,
          and precious metals).  Delaware has a well regarded
          business law system that protects assets, and this also
          keeps the assets out of the owner's home state.  The
          leading experts in creating Delaware family limited
          partnerships are Asset Protection Corporation, Suite
          201A, 14418 Old Mill Road, Upper Marlboro MD 20772.
          
          
          
