People who inherit a closely held limited partnership interest can find themselves with an asset which has not been optimally designed for asset protection purposes. An attorney called me to discuss one of his client’s who reported his inheritance of 95 percent of the limited partnership interests in a limited partnership that owned free and clear a valuable piece of property. The attorney’s client assumed his inherited partnership asset was protected from a threatened lawsuit because the judgment creditors would be limited to a charging lien remedy against the inherited limited partnership share. His situation was not that simple.
I asked about the partnership’s general partner. The client’s parents had set up a corporation to be the general partner. The parents, and now the client, owned all the stock in the general partner corporation. I think the client has an asset protection problem with the general partner. The judgment creditor could levy upon his shares in the corporation and thereby gain ownership and control of the partnership’s general partner. The general partner decide if and when to make cash distributions which are subject to the creditor’s charging lien.
This client, a potential judgment debtor, needs to get rid of the general partner. Most partnership agreements and Florida’s partnership statutes provide a general partner the opportunity to resign; a person cannot be forced to serve as general partner. Most partnership agreements provide the limited partners a mechanism to remove the general partner without case. In my opinion, this general partner should be removed and accept the removal through voluntary resignation.
The substitute general partner can be a multi-member LLC. The client’s creditors could no levy upon and gain control of the LLC and thereby gain control of the partnership (Olmstead applications aside). I think this change would withstand fraudulent transfer/conversion attack.
Last updated on May 22, 2020