Ok, maybe I don’t understand asset protection nearly half as well as I thought I did, but the attorney I spoke to today said something that didn’t make sense.
He said if I just put all my rental properties into a LP then if any tenant tried to sue they could only get a charging order against the/a partners distributions.
I told him the way I understood it was that if a partner of the LP is personally sued then that is the case. However, if a tenant sues the owner of the rental (the LP) then all of the LP’s assets are up for grabs. Granted the limited parner’s asset are safe but that is not the goal here.
I am not so egotistical as to think I know more than an attorney who specializes in Estate Planning & Asset Protection but who is right here? :-\
Wow, all these real estate investors and nobody knows the answer to this. I must be in the wrong place… 
I am not an attorney, but I have read and heard this in several places. The same applies for certain types of trust.
As you mentioned, the charging order can garnish the distrubitions, but not the unlying assets. Thus the controling entity (eith trustees or partners) can decide not to make any distrubitions and thus the plantiffs get NOTHING!
But wait, he forgot to tell you the juiciest part. Occuring to IRS rules (again as I have read and been told), the plantiff must pay taxes on this “gain” IMMEDIATELY (even if they do not collect on the judgement). Yes, this is truly an anomally of the tax code. This pretty much should make frivilous lawsuits disappear like cockroachs in the daylight.
I have heard and read simlar issues like this, and have only this to say…
What if you’re an individual? Can’t form a Limited Partnership that way…
An LLC still requires two or more people, so I have formed a C Corporation, which can then protect all the assets I transfer to it.
Or just get an umbrella policy for liability, just in case you’re liable for something. But remember, you must be found liable for some wrong doing or negligence on your part. Then your assets and you are protected in case you’re ever found liable in a court case.
Good luck!
Kirk
kbrandau, my LP has more than one partner.
aak5454, I know the IRS rules about the plantiff having to pay taxes on these phantom distrubuitions… A nice deterrant. Especially when the LP decides to withhold distrbutions, for the betterment of the company of course.
However, IMHO this kind of asset protection only protects the LP from outside attack against you personally and summarly a charging order against a partner’s interest in the LP, which amounts to no more than a paper tiger anyway. See IRS above.
What I need to protect myself from most are my dangerous assets. They are dangerous because the attack comes from within; the tenant’s lawyers.
If a tenant files a suit against a landlord for negligance or some trail lawyer needs a paycheck, it will be filed against the owner of the property. As a partner I don’t own the assets, the LP does, so i don’t own the property. Therefore the suit is against the LP. Now the LP’s (insert LLC, C-Sorp, et. al. here) asset’s can be seized! :o
I think I will keep looking for a better attorney at law.
In most states, LP’s & LLC’s are protected via charging order. This means that a creditor of one of the partners (I use the term generically) can get a court order to take any distributions made to said partner. If there are no distributions, the creditor gets nothing BUT has tax liability to the IRS for any undistributed income attributable to the partner. That’s technically how charging orders work.
Like many things, that protection is not absolute. It doesn’t keep you from getting sued. It doesn’t keep you from incurring significant attorney’s fees to defend yourself. Creditors have foreclosed on the partnership interest and sold it - usually at a low price if other real partners are involved (i.e. - not a single member operation). In some cases with small, closely-held partnerships, the charging order has been ignored altogether. Also, having all your assets in LP’s or LLC’s and pulling no cash out of them for as long as a creditor is willing to wait is easier said than done.
In short, charging orders provide a degree of protection against personal creditors, and certainly improve your ability to settle on favorable terms. But that protection is also subject to some serious caveats and not nearly as foolproof as the speaking circuit carnie types would have you beleive.
John Hyre
zenith,
I’m a beginner here, but i think what some folks do is just form multiple LLCs (LPs, etc.) for each purchase…that way you set up a firewall between the companies…
John, thanks for qualifying the take on charging orders. Can you tell me what happens when a tenant sues the property owner and the property is owned by an LP or LLC? Are the entitie’s assets seized or is there only a charging order. I believe the former is true while this attorney believed the latter.
Big dog, thats exactly what I have been planning to do. Set up firewalls between my dangerous assets so if one catches legal fire they don’t all burn down.
Details matter. For example, in some rare cases, a limited partner in an LP who also owns the general partner is not entitled to liability protection.
In general, as a plaintiff’s lawyer, I would sue the individual manager and the entity. Assuming I obtained a judgment against both, I’d:
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Go after anything the entity owns. If I had a judgment agianst the original LLC/LP, I’ve bypassed the need to get a charging order against it.;
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Go after anything that the individual owns, including interests in any other entities.
John Hyre
Ok, so from what you have said it sounds like I was correct in my assumptions and the attorney I spoke to was wrong. I guess his error comes from concentrating on the estate planning side of it rather than the asset protection. That and not dealing with real estate investors on a regular basis.
Time to interview again; attorney #3 come on down!
Thanks
Ok, attorney #3 (who specializes in Real Estate law) agreed with my position completely. Which means the prior attorney doesn’t know what he was talking about or he was just having a bad day. I knew those red flags that came up in our initial consultation were not unfounded.
The moral of this story: an attorney’s word is not gospel (with the exception of John Hyre of course)
If your entity gets sued, wouldn’t you have some large amount of liability insurance to help protect your holdings? I’m thinking that the insurance company will provide the lawyers to defend you, and if you lose the case, the insurance oould cover the judgement up to the insurance limit of liability.
DaveT, you are correct. I think one of the best things about liability insurance is it will cover legal fees. Most lawyers want a big retainer to get started.