Family Limited Partnership – Part Two
September 17th, 2009
What happens if you are sued?
Suppose that you are sued and you have a Family Limited Partnership. Your creditor obtains a $50,000 judgement against your name. The creditor can attach your Family Limited Partnership interest but only to the extent of your income as a limited partner called a charging order.
The creditor who attaches a family limited partnership interest cannot participate in the management of the family limited partnership and thus cannot force the general partner (your spouse) to distribute income.
As general partner, you spouse stops paying the Family Limited Partnership’s distributions because in his or her discretion the Family Limited Partnership would be better served to reinvest the capital.
A year later after being sued with Family Limited Partnership in place – send the creditor IRS form for taxes on income they did not receive!
One year later, the creditor still has a $50,000 unsatisfied judgement. The Family Limited Partnership sends the creditor an IRS Form K-1 for the creditor’s share of your ‘phantom’ income. In this Family Limited Partnership example, the Family Limited Partnership asses are worth $300,000. At 10% annual tax return, your share of income would be approximately $30,000 and the creditor would have to pay income taxes in the ballpark of $10,000.
If the creditor does not pay the tax due on your undistributed share of income, the IRS will come after the creditor. You will be in a strong position to force your creditor to settle the claim for a fraction of its value.
What is the general partner of the Family Limited Partnership gets sued?
Suppose a creditor sues your spouse, the general partner of the Family Limited Partnership and tries to attach your spouse’s general partnership interest. The Family Limited Partnership can exercise its power under the Family Limited Partnership agreement to buy out her general partnership interest in the amount of $2,000 or 2%. The Family Limited Partnership then finds a new general partner.
With proper plan, the general partner of the Family Limited Partnership received full compensation for her Family Limited Partnership share. As you can see, the Family Limited Partnership is a special asset protection tool that allows you to take control of your money fully.
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