Nine Ways to Maximize Family Limited Partnership Protection
There are other strategies to bolster the protection from Limited Partnerships:
- The limited partnership agreement should give the general partners full discretion to withhold distributions of profits for purposes of future investment
- The agreement should also specifically restrict the transfer of a limited partnership interest without the consent of the general partner and/or a majority of the limited partners
- The agreement should further prevent a limited partner from withdrawing capital contributions without partner consent
- The agreement should also carefully specify that a creditor of a limited partner becomes only an assignee of the limited partner's interest and acquires no partnership rights other than the right to distributions. Furthermore, the agreement should allow, in a general partner's sole discretion, a transfer of a limited partner's voting rights, if necessary to ensure that a creditor who obtains a charging order also becomes liable to pay the debtor's share of taxes from partnership profits
- A particularly effective strategy is for a limited partnership agreement to allow the general partner to assess the limited partners for a further contribution and to extend this obligation to any charging order creditor. The agreement could further stipulate that failure to meet such obligations would cause a partner to forfeit his partnership interest, without entitling him to any return of capital he or she had contributed to the partnership
- High-risk family members should own a smaller partnership interest, but one proportional to the asset contributions to avoid gift tax consequences or claims of fraudulent conveyance. The agreement should also give the low-risk family member a disproportionately high share of the profits
- Limited partners may also consider granting an option-to-purchase the partnership interest back to the limited partnership. Issued in advance of a creditor claim, it can be an effective way to divert partnership interests
- Spouses may hold their limited partnership interests as tenants-by-the-entirety in states where this type of tenancy is recognized. This further protects the interest against creditors of any one spouse
- When investing in a large, non-controlled limited partnership, or limited liability company, title ownership in a family limited partnership. This protects the distributions you may not be able to avoid
Yes, You Can Lose Everything!
You may think that your wealth is safe and that you don't need protection. But don't delude yourself and accept reality — for every 60 minutes you spend making money, spend 60 seconds thinking about how to protect it!