There are two asset protection tools which have substantial benefits for estate planning as well as asset protection. These are the limited partnership (LP) 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 an LP.

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 LP agreement or the LLC operating agreement.

Asset Protection Benefits of a Partnership or Limited Liability Company

A limited partnership and a limited liability company offer the same degree of asset protection. The investment interests in an LP or LLC are not “exempt” from levy by creditors of the limited partner. There is no constitutional or statutory provisionin Florida which protects a limited partner’s or an LLC’s member’s investment. Asset protection is available by virtue of the limited procedural remedy given to creditors to levy upon a debtor limited partner’s interest and an LLC membership interest.

A creditor has no right to seize property within a partnership or an LLC to satisfy the debt of a partner or member. Moreover, in a properly drafted LP agreement or LLC agreement, a creditor has no right to vote or inspect the books and records of the LP or LLC. Under Florida law, a creditor’s rights are limited to receiving distributions of cash or other property made from the LP or LLC to limited partners or LLC members. 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 LP/LLC and make no distributions which might be taken by a lurking creditor. If the general partner/manager does not order distributions of cash or property, then the creditor gets nothing.

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 an LP or LLC interest and the general partner/manager does not distribute partnreship 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.