Articles Posted in Asset Protection

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Image of family members who run a florist business

Partners pay tax on income earned even if it is not paid out to them

The taxation of Family Limited Partnerships should be carefully considered in advance of setting up and rolling out your new FLP.

FAMILY LIMITED PARTNERSHIP DEFINED

State laws have provisions allowing people to establish limited partnerships.  Limited partnerships provide limited liability protection for the limited partners similar to the liability protection afforded corporation shareholders.  The limited partnership is established by filing a form in the state in which it is being established and by the preparation of a limited partnership agreement which governs the ownership income and management of the partnership. The limited partnership agreement is custom prepared by the attorney forming the limited partnership and can have many variable aspects that need to be considered as part of the formation process.

A family limited partnership is legally no different from any other limited partnership except that it’s only members are family members. The term “family limited partnership” is something commonly used in the estate planning and asset protection field. A family limited partnership will have one or more general partners and one or more limited partners. Their respective roles are defined in the chart below:

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Purposes of Family Limited Partnerships

Image of umbrella over house, care and stack of coinsPeople form family limited partnerships (FLP’s) to (i) transfer ownership of properties or assets to family members while still maintaining control; (ii) to save on estate and gift taxes; (iv) to shift income from parents’ higher tax brackets to children’s lower tax brackets; (iii) to provide some asset protection against liabilities of the property or assets put into the limited partnership or (iv) to provide asset protection against creditors of the limited partners.

Typical example-an apartment building

A mom and dad own a 10 unit apartment building which is paid for and provides substantial cash flow income.  They have 3 children and 1 of the children is heavily in debt and cannot handle money.  They transfer the apartments into a FLP and the FLP agreement provides that the parents own 40% of the assets and income and the children own 60%.  It is set up so that payment of income is discretionary with the parents who are the general partners.  The FLP prevents any creditors of the building from going after the parents’ or the childrens’ individual assets outside of the FLP.

The FLP prevents any of the childrens’ creditors from forcing a payment of income to pay the children’s debts.  The parents essentially still control the money flow and manage the property. There are many variations possible to this so the entire financial and legal picture needs to be gone into before jumping into any FLP.

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Irrevocable Life Insurance Trusts for Asset Protection

Don’t wait until you get sued to do asset protection

BENEFITS OF AN IRREVOCABLE LIFE INSURANCE TRUST (ILIT)

Irrevocable Life Insurance Trusts – These types of trusts are not often thought of as an asset protection device.  However, they have many benefits, including:

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Don’t wait until you get sued to do asset protection

Danger of moving assets illegally – Law Against Fraudulent Conveyances

DANGERS OF OWNING ASSETS IN YOUR OWN NAME

Image of asset protectionIf you lose a lawsuit that has been filed against you personally then the winning party obtains a court judgment.  That judgment is then enforceable against any accounts or property owned in your name.  Also, the judgment is enforceable against whomever you transferred the accounts of property to if the transfer was a gift or a sale for less than fair market value.

DON’T WAIT UNTIL YOU ARE SUED TO PLAN

You can be sued under the law against fraudulent conveyance for improper transfers.  Also, whomever you have transferred money or property to can be sued to make that asset transferred available to the creditor. Any transfer of money or property out of your own name and into an entity needs to have a legitimate business purpose.  Protection from personal liability is such a purpose. 

However, any transfers with intent to hinder, delay or defraud a creditor may be set aside under the law against fraudulent conveyances. Also, transfers without receiving equivalent value and which render you insolvent or put you in the position of being unable to pay your debts would also violate the law.  Thus, if you have been sued or are facing a definite liability or claim, it may be too late to make asset protection transfers.  The time to do transfers is BEFORE you have any significant claims or lawsuits.

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Get your assets out of your personal name AND get your name off of public records associated with the asset.

DANGERS OF OWNING ASSETS IN YOUR OWN NAME

If you lose a lawsuit that has been filed against you personally then the winning party obtains a court judgment.  That judgment is then enforceable against any accounts or property owned in your name.

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Get your assets out of your personal name

DANGERS OF OWNING ASSETS IN YOUR OWN NAME

Image of a home inside of a safeIf you lose a lawsuit that has been filed against you personally then the winning party obtains a court judgment.  That judgment is then enforceable against any accounts or property owned in your name.  Thus, if you operate a business in your individual name (instead of the business being operated in the form of a corporation) and if you lose a lawsuit against that business then the judgment is enforceable not only against the business assets but also against your home and take accounts in your name personally.

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A permanent estate builder that provides asset protection and covers future generations

Trust

What does a Life Insurance trust do?

Life Insurance Trusts – A Life Insurance Trust is a permanent, irrevocable trust that is established to own one or more life insurance policies that cannot be altered, amended, or revoked. When the insured named in the life insurance policy dies, the life insurance company pays the policy proceeds to the Life Insurance Trust, instead of to the estate of the insured. The Trustee of the Life Insurance Policy then distributes the proceeds to the beneficiaries of the Life Insurance Trust according to the instructions in the Declaration of Trust.

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