FLORIDA ASSET PROTECTION - Family Limited Partnerships
The family limited
partnership has both substantial estate tax benefits and asset
protection advantages. In general, alimited partnership
is a partnership consisting of two classes of partners, general
partners and limited partners. A general partner has general
liability for all partnership debts, and he has the responsibility
and authority to manage partnership business. The general partner
controls the partnership’s assets, investments, and its business
decisions. A limited partner has only an investment interest
in the partnership, and he plays a passive role in partnership
business. A limited partner’s liability is limited to the amount
of capital he has contributed to the partnership. To maintain
the limitation on his liability, the limited partner is prohibited
from participating in any management or control over the partnership’s
assets or business. A limited partnership interest is intangible
personal property, and therefore, the interest is assignable
and transferable by the limited partner subject to restrictions
set forth in the partnership agreement. One can be both a general
partner and limited partnership simultaneously.
A family limited partnership is a limited partnership that consists of members of an immediate family, although extended family members also participate in these types of partnership. In a family partnership, one or both spouses usually serves as the general partner, and the spouses, together with their children, are typically limited partners. At formation, the parents typically own almost all of the limited partnership investment interests.
Asset Protection Benefits of a Family Partnership
The interest of a limited partner in a limited partnership is not “exempt” from levy by creditors of the limited partner. There is no constitutional or statutory umbrella in Florida which protects a limited partner’s investment in a limited partnership. Nevertheless, Florida limited partnerships provide an excellent asset protection vehicle for the limited partner. This asset protection is available by virtue of the limited procedural remedy given to creditors to levy upon the debtor limited partner’s interest.
Most states, including Florida, have adopted what is known as a “Uniform Limited Partnership Act”. The Act, as codified in Chapter 620 of the Florida Statutes, dictates the procedure through which a creditor of a limited partner can levy upon the debtor’s interest in a limited partnership. The Act maintains a clear distinction between a limited partner’s investment in the partnership and the partnership’s ownership of partnership property. A creditor of a partner has no right to seize assets within the partnership to satisfy the debt of a partner. This reflects the policy that it is more important to protect other partners’ interests in a partnership than it is to permit the creditor of just one partner to satisfy a judgment in a manner that might disrupt the partnership’s business.
The creditor’s rights under the Act
are limited to the rights given assignees of limited partnership
interests. Under the Act, an assignee of a limited partner,
whether such assignee obtains such status by a voluntary or
involuntary act (i.e., an action by a creditor to seize the
property would be considered an involuntary act), has only the
right to receive distributions of cash and other property from
the partnership to the limited partners. If the general partner
does not order any distributions of cash or property, then the
assignee has no right to any partnership property.
The Act further provides
that a creditor of a limited partner seeking to seize distributions
from a partnership must apply to a civil court to obtain a charging
lien against partnership distributions. The court upon application
will issue a charging order against the partnership granting
a lien to the creditor on any distributions earmarked to the
debtor limited partner. If the general partner awards no distributions
to limited partners, then the creditor gets nothing. Moreover,
in a properly drafted partnership agreement, a creditor assignee
can be given no rights to inspect the books and records of the
partnership so that he is unaware of partnership income or partnership
business. In a family partnership, the general partner is unlikely
to order distributions where a limited partner’s creditor is
lurking. Where a charging lien exists, the general partner likely
will hold money in the partnership and find other alternatives
to transfer money out of the partnership to family partners.
Florida appellate
courts have affirmed that a charging lien is a creditor's exclusive
remedy against a debtor's limited partnership interest, and
more particularly, a creditor may not resort to a judicial foreclosure
of a limited partnership interest. [See Givens v.
National Loan Investors, LP, 724 So.2d 610 (Fla. Dist.
5, 1998)].
Under general partnership
taxation principals any income earned by a limited partnership
is taxable to the limited partners on a flow through theory
regardless of whether the income is actually distributed to
limited partners. If a limited partnership has taxable income
and the general partner decides to retain the income within
the partnership, the limited partners are still liable for the
income tax. A Revenue Ruling (Rev. Rul. 77-137) suggests that
where a creditor has a charging lien on a limited partnership
interest, and the general partner does not distribute partnership
income, the creditor, not the debtor limited partner, is responsible
to pay the tax on the allocated income. In this manner, a charging
lien can become a “poison pill” whereby the creditor of the
limited partner receives no money from distributions, but incurs
tax liability in his effort to collect a judgment debt. Therefore,
given the limited nature of the charging lien remedy and the
exposure to partnership taxation, most creditors are reluctant
to pursue a judgment against a debtor’s interest in a limited
partnership. The limited rights of the creditor/assignee makes
the family partnership an effective asset protection tool. The
family partnership agreement is a complex asset protection device
which should be drafted by an attorney experienced in asset
protection law.
The estate tax advantages
of a family partnership are discussed elsewhere on this website.
