FLP for asset protection

Copied From http://www.pdmg.net/assetprotection/
Question follows,

  1. A trust, no matter how well formed, has dangerous exposure. This is because any judge can set any trust aside. It does not matter how well structured the trust is, or whether it is a conventional statutory-law trust, or a form of the common-law business trust.

  2. Many people depend on the common-law pure business trust which is supposed to operate on the principle of common law, and is supposed to be outside of the jurisdiction of the courts. However, as has been proven time and time again, any whimsical judge can order that the trust be set aside. “Poof”, there goes your protection. It does little good to be right if the court has demolished the protection of your pure business trust, and has seized your assets. At best it would take you years of legal struggle to straighten the issue out, and meanwhile your assets are long gone.

Clever asset protection strategists have combined the asset protection provisions of the family limited liability partnership agreement with the asset protection provisions of the trust. This has become a better overall asset protection device than is the trust alone. Here is how the limited liability partnership works: Let us take an example of John Jones who wishes to place an asset (in this case, his home) in a legal status so that it cannot be seized in the event a judgement is ever levied against him. John will place his home in an ownership status which involves using both a trust and a limited partnership agreement. This provides John with two levels of asset protection.

  1. First John establishes a trust. It may be any conventional trust, or a common-law business trust. The form of trust depends on John and his knowledge and level of confidence in the types of trusts which are available. John then establishes himself as the “Trustee” of the trust, and designates that one of the purposes of the trust is to hold ownership in real property. He then establishes as beneficiaries of the trust either his children, his wife, or some other trusted persons.

For purposes of our example, we will have John name his trust “The 8722 Appletree Lane Trust.” Remember that a trust can have any name, in this case the trust being named after the address of his home.

  1. Now John establishes a family limited liability partnership as his second level of protection. The trust, combined with a limited partnership agreement, provides the best level of protection available. In this case, John will name himself as the General Partner, and he will name the trust (“The 8722 Appletree Lane Trust”) as the Limited Liability Partner. “The John Jones Family Limited Partnership” is the name which he gives to the new limited partnership.

  2. John assigns one percent (1%) ownership of the family limited partnership to the General Manager (himself), and he assigns ninety-nine (99%) ownership to the Limited Partner (the trust). THIS IS THE KEY!

  3. John then prepares the suitable deed reflecting that the home has been deeded from John Jones to the “John Jones Family Limited Partnership.” Then John goes to the county courthouse to record this deed. He will probably find that because he has used the same name that is on the existing deed (John Jones) on the new deed (The John Jones Family Limited Partnership), the recorder will assume that only the form of ownership is taking place, and that the transaction is not a “sale” and that a new ownership is not taking place. Therefore John will probably only have to pay a nominal recording fee, and not have to pay the larger recording fees (document stamps) which are associated with a completely new change of ownership.

  4. Now John has all of the benefits and controls concerning his home that he had before since he is the General Partner who is directed by the provisions of the limited partnership agreement to control all affairs concerning his home. He has learned that “control” provides all of the same benefits of “ownership.” By placing his home in a trust, John has established a good start towards completely protecting his home from the dangers lurking out there in today’s wild and woolly world.

  5. Years go by. Then, by one of the vagaries of life (auto accident, business setback, IRS judgement, etc.) a $2 million dollar judgement is levied against John Jones. The judgement holder’s lawyers begin to look for John’s assets with a view toward seizing them to satisfy the judgement. The first thing that they will look at is John’s home, which is the most obvious asset. They then discover that it is owned by a limited partnership.USUALLY THIS STOPS THE LAWYERS COLD. Why? Because they know, that by law, they can only seize the percentage of the family limited partnership which is owned by John. In this case, THEY CAN ONLY SEIZE ONE PERCENT OF THE PARTNERSHIP. At this point they know to give up, because the hassle of seizing one percent is just not worth the effort. Should they go ahead and seize the one percent ownership, things can get complicated for them; for example, they may then become responsible for all property taxes on the property.

  6. They are also discouraged from further efforts to seize the home because of the second level of asset protection; the fact that the General Partner is a trust. If, by some incredible feat of magic, they were to pierce the Limited Partnership (the first level of protection), they would then have to start all over to attempt to pierce the second level of protection (the trust). It just isn’t worth their time. They give up, and go searching elsewhere for easier pickings. John’s asset protection strategy has served John well.

  7. These same principles apply to protection of any assets. Automobiles, personal property, businesses, other real estate, etc. can all be protected in the same manner.

I recently went to a seminar that recommended this same type of protection. The seminar also recommended a clause in the FLP that said to the effect “general partners shall make disruptions for funds, except when the general partners decide not to make disruption of funds then no funds shall be disbursed.” The speaker said you can get sued decide not disburse funds, but the clamant will be forced to pay taxes on the money they were suppose to (but did not) receive. Has anyone used this type of protection or have any comments. Thanks Charles

This set up is bogus because a business entity like an FLP cannot own a personal residence or any personal assets. It can only own business assets and must have a valid business purpose. In court, John’s creditors will get the proceeds from the sale of the house. The author of the article wouldn’t know this because (as he claims) he is not an attorney.