One of the most effective and versatile asset protection tools is not protected from claims by the Florida Constitution or Florida Statutes. This vehicle, which has substantial benefits for estate planning as well as asset protection, is the family limited partnership.

A limited 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.

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.