The 2009 Nevada legislature passed an interesting estate planning statute designed to increase the effectiveness of family limited partnership (FLP) and family limited liability companies (FLLC) for estate tax planning. The bill, SB 350, went into effect on October 1, 2009. An article about the new law appeared this week in Lawyersusaonline.com. Lawyers USA Online. I was intervied by the author, Correy Stephenson, in order to discuss the bill’s effect on asset protection planning.
The bill provides for new business entities called Nevada Restricted Limited Partnerships and Nevada Restricted Limited Liability Companies. The “restriction” aspect means that the LP or LLC is restricted from making distributions to its partners (members) for a period of up to ten years. The restriction against distributions effectively locks money inside these entities. In theory, the applicable restrictions warrant greater valuation discounts from fair market value of assets held in these new entities. For families with taxable estates a greater valuation discount means lower estate tax bills. Estate tax planning is the primary benefit of the Restricted LP and LLC.
I think that restrictions against distributions contemplated by the new Nevada law may also have an asset protection benefit The judgment creditor’s remedies against the debtor’s interests in either a partnership or LLC is limited to a charging lien against distributions, if any, when made. If a judgment debtor was not receiving cash distributions from a partnership or LLC controlled by himself or a family member the creditor’s charging lien would yield no recovery. However, the judgment creditor could pursue a court order requiing distributions be made by the general partner or manager. In my opinion, the judgment debtor would have a better defense against compelled distributions where the partnership or LLC owned by the debtor was a Nevada Restricted LP or LLC, all other things being equal. As the law is so new it will take a long time before its terms are tested in an asset protection court case.
Last updated on May 22, 2020