Asset Protection in the New Millennium
We live in litigious times. People sue each other at the drop of a pin and juries grant ever larger awards. Verdicts of four or five million dollars are commonplace.
One modern phenomenon is the "deep pocket lawsuit." Someone who considers himself wronged will sue not only the person he believes responsible, but also a related party, upon the flimsiest of claims, simply because that second party is wealthy while the one really responsible is not. The hope is that the wealthy defendant will throw some money at the plaintiff to settle the lawsuit, rather than pay heavy legal bills in a lengthy litigation. Guilt and innocence do not matter.
In addition, newer more creative theories of liability subject each of us to the danger of losing our hard-earned assets and life savings as a result of an astronomical verdict for something for which we would not have been responsible a few years ago. Landlords are responsible for the present effects of lead-based paint applied many years before they ever purchased the property (and insurance companies refuse to cover this liability). An innocent "fender bender" may result in a multi-million dollar lawsuit for "psychological damage" because the plaintiff claims she now has insomnia and the plaintiff's spouse claims "loss of companionship."
Combine these developments with the fact that many hard-working, honest people find themselves with more debts than they can handle and little or no income to cover those debts.
The need for each of us to protect our assets -- the money, securities, homes and other things for which we have worked so hard over the years -- is clear and unquestionable. Almost all of our assets are vulnerable to attack: to being attached, frozen, seized and taken away by a hungry creditor. Yet, we each have a right to protect those assets; to preserve them as security for our later years and as our legacy to our children and grandchildren.
Can we do this? Can we legally protect and preserve our assets from attack by litigants, collection agencies, the I.R.S.? The answer is YES! We can and should protect our assets by using a little known law that exists in all fifty states. Not taught in law schools, overlooked and misunderstood by most lawyers, this law can be used to protect your assets and reduce (and possibly eliminate) estate taxes.
The law is called the Revised Uniform Limited Partnership Act ("RULPA," for short) and here's how it works: RULPA states that assets owned by a limited partnership are not owned by the individual partners. Therefore, those assets cannot be attached by a creditor of an individual partner. So... If your assets are owned by a limited partnership, they are no longer owned by you and they cannot be attached by your creditors.
But you can still CONTROL these assets. Limited partnerships have two kinds of partners: General Partners and Limited Partners. The General Partners are the "dictators" of the partnership. They control the partnership and all of its assets. There is no majority vote, no elections and no review of a General Partner's decisions.
Limited Partners have only one right -- the right to their fair share of partnership profits IF the General Partner decides to distribute those profits. The General Partner can get salary from the partnership and if the General Partner says Okay, a partner can borrow money from the partnership.
The partnership may be a "Family" Limited Partnership; that is simply a partnership in which all of the partners are family members. Mother and Father are both General Partners and Limited Partners (you can be both at the same time). Each child is a limited partner.
If Mother and Father place the family's assets into such a partnership, those assets will be protected from attack by creditors. Why? Because RULPA says so!
Of course, the law doesn't allow you to transfer assets with the specific intent of keeping bona fide creditors away from them, but that's the "secret weapon" of RULPA. By placing all your assets into a Family Limited Partnership in which you are the General Partner, and then giving away limited partnership "shares" to your children, you reduce the value of your estate but you never lose control over the assets in the partnership.
This reduces your estate taxes (possibly also income taxes) significantly. Depending on your age and the size of your estate, you may end up with zero estate taxes. This is recognized by the I.R.S.!
If your assets are significant enough to be subject to estate taxes, the Family Limited Partnership becomes a valuable estate planning tool. If the transfer of assets is done for estate planning you don't have the "specific intent" to block creditors. The transfer of your assets into a Family Limited Partnership, while eliminating estate taxes, also creates a bullet-proof shield around those assets.
The establishment of a Family Limited Partnership is a complicated, document-intensive procedure that should not be entrusted to general practice lawyers. It requires the experience and knowledge of an expert who is well versed in estate planning, taxation and asset protection law. But if done properly and carefully, under the protection of RULPA, a Family Limited Partnership will protect all that you have worked and saved for throughout your life and will preserve those assets for you and your family.