FLORIDA ASSET PROTECTION - Partnerships and LLC Protection
There are two asset protection tools which have substantial benefits for estate planning as well as asset protection. These are the limited partnership and the limited liability company (LLC).
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 investments, distributions, and other business decisions. A limited partner has an investment interest in the partnership, and he plays a passive role in partnership business. An individual can be both a general partner and a limited partner in a limited partnership.
A limited liability company is a business entity created pursuant to Chapter 608 of the Florida Statutes. An LLC is controlled by a manager. The manager directs the LLC’s business affairs and determines the amount and timing of cash distributions. The investment interest in an LLC is held by members. Members invest the initial capital in the limited liability company, and they incur gains or losses from the LLC’s business. An individual can be both a manager and a member of an LLC.
An LP interest and a membership interest in an LLC are both intangible property and both types of interest are assignable and transferrable subject to restrictions of the limited agreement or the LLC operating agreement.
Asset
Protection Benefits of a Partnership or Limited Liability Company
A limited partnership and a multi-member limited liability company similar asset protection benefits. The investment interests in a limited partnership and in a multi-member LLC are not “exempt” from levy by creditors of the limited partner. There is no constitutional or statutory provision in Florida which protects a debtor's limited partnership interest or an LLC’s membership investment. Asset protection is available by virtue of the limited procedural remedy given to creditors to levy upon a debtor's limited partner interest and an against his membership interest in multi-member Florida LLC.
A creditor has no right to seize property titled in the name of a limited partnership or a multi-member LLC to satisfy the debt of a partner or member. Moreover, in a properly drafted partnership agreement or multi-member LLC operating agreement, a judgment creditor has no right to vote or inspect the books and records of the partnership or LLC. Florida statutes permit the creditor to apply for a charging lien on the distributions of cash or other property made from the limited partnership or multi-member LLC to the debtor member or partner. In most closely held business arrangements where one partner or member has a creditor problem, a cooperative general partner/manager will retain profits inside the entity and make no distributions which might be taken by a lurking creditor with a charging lien. If the general partner/manager does not order distributions of cash or property, then the creditor gets nothing from the charging lien.
In addition, a creditor with an active charging lien may incur income tax liability. A 1997 Revenue Ruling suggests that where a creditor has a charging lien on a limited partnership or multi-member LLC interest and the general partner/manager does not distribute partnership income, the creditor, not the limited partner/member, is responsible for paying the tax on allocated income. The charging lien may become a "poison pill" as long as the creditor receives no money but incurs income tax liability in his effort to collect a judgment debt.
One practical limitation with the multi-member LLC or partnership charging lien protection is that the debtor’s cash and assets can remain trapped inside the entity as a "patient creditor" holds his charging lien anticipating future distributions. Members and limited partners subject to charging liens have used varying means to access cash from their LLC or partnership entity to maintain a normal lifestyle. One solution is for the partnership or multi-member LLC to pay the debtor a salary which is exempt from creditors if the debtor is head of household. Or, the entity can loan money to the debtor. Another solution is for the multi-member LLC or partnership to purchase an annuity naming the debtor as annuity beneficiary.
Florida enacted amendments to its limited partnership statutes which, among other things, affirmed that a charging lien is a creditor's exclusive remedy against a debtor's limited partnership interest, and more particularly, the amended statute states a creditor may not resort to a judicial foreclosure of a limited partnership interest or other equitable remedies. In 2011, the Florida legislature similarly amended Florida’s LLC statute to provide that a charging lien is the exclusive creditor remedy against a debtor’s membership interest in a multi-member Florida LLC. The new LLC law expressly permits a judgment creditor levy upon or foreclose a debtor's membership interest in a single member LLC and thereafter replace the debtor as the LLC's only member.
Single member LLCs should consider adding at least one other member to provide asset protection. Additional members might be new investors, family members with a significant LLC interest, or more complex entity members such as grantor trusts or limited partnerships. The new LLC statute does not define a miniumum percentage ownership for a second member. A new second member should contribute adequate consideration for their interest in the LLC. A gift of an interest in a single member LLC to a another person may be subject to fraudulent transfer attack.
Debtors with a single member LLC who for some reason do not, or can not, add a second member for fair consideration should consider altenatively placing provisions in the LLC operating agreement which restrict a creditor's ability to replace the LLC manager so that the creditor faces obstacle to control over LLC assests and distributions.
Estate Taxation Benefits of Family Limited Partnerships And Multi-Member LLCs
The family partnership and LLC may help a family reduce estate tax liability. Although the tax benefits in theory apply to either a taxpayer's LLC membership interest or his limited partnership interest, up to now most estate planners have used the limited partnership for family estate tax planning. The IRS permits the decedent's family to take "valuation discounts" when inheriting the decedent's interests in a family limited partnership. The IRS recognizes that a limited partnership interest in a family partnership are worth less than the underlying asset. The limited partnership interest represents a partial interest in the assets owned by the partnership. The partial interest in a partnership is valued less for estate tax purposes because the partial interest is less marketable than the underlying asset itself and because the owner of the limited partnership interest does not control the underlying asset.
