Forming a Corporation – Part Three

May 8th, 2008

Family Limited Partnership as an asset protection tool

Family limited partnership is another asset protection strategy. If you get sued and you have a family limited partnership, the plaintiffs will most likely not be able to get any money from you in the same way as the limited liability company (LLC) example above. However, the IRS wants their cut. The plaintiffs will have to pay taxes on what he or she won in court whether the plaintiffs actually received any money or not.

Forming a corporation may save you in case of divorce

Divorce happens more and more often nowadays. The example below shows how forming a corporation saves a man’s fortune from divorce settlements.

John is a wealthy man. He married a young wife for love. His wife had no asset. John’s estate planning attorney pledged John to put all his assets in limited liability companies before he married his young wife and John protected all his assets the way his estate planning attorney recommended.

After a year of marriage, John’s young wife divorced him. In a lot of states, when you get divorced, you and your spouse each gets half of all the assets and income including real estate properties. So, if all of John’s assets had been in John’s name, he would have lost half of all of his assets at the time of the divorce.

John told his ex wife’s divorce attorney that all of his assets was in limited liability companies (LLCs). To access John’s assets, she could get a charting order and would probably be awarded 50% of whatever is distributed from the LLC that year. No matter how much the LLC earns that year, if the manager decided not to distribute anything, John’s ex wife would get nothing but owe taxes on half of what the LLC made. The following year, she would ALSO have to pay taxes on the same amount even if they were not distributing that year either. This allows John’s lawyer to negotiate a more favorable settlement than if everything had been in John’s name.

Asset Protection 101