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A Family Limited Partnership for asset protection in California

A Family Limited Partnership (FLP) in California for Asset (Lawsuit) protection is the topic of this blog post. The Lawsuit protection area is a primary concern of many people as California is a very litigious state. As one well known lawyer joke goes, “Why did New Jersey get all of the toxic waste dumps while California got all of the lawyers.  New Jersey got first choice.”

I have worked in California and Federal litigation since 1995 and hves seen things that are astounding to put it mildly.  Early in my career,  I worked on a case preparing an answer to a complaint for someone who was being sued because he had performed some work for someone whose house had slid down a hill.  The person being sued was the electrical contractor!!!!  There were so many defendants that listing all of them on the caption would take almost the whole first two pages.  Now that is scary!!

While most attorneys are ethical and would never dream of taking on a case like that, some are not so ethical and will gladly file lawsuits just to get some “nuisance money.” And some also work with process servers who are unethical to say the least. I once saw a case where a process server claimed to personally serve someone at a house in California when the individual had sold the house and moved to Texas over 10 years before, and to top if off was at the exact moment of alleged “service” on an airplane flight to the Philippines!

Clearly for certain individuals, especially those with substantial business and/or personal assets, Lawsuit protection should be looked upon the same way as money spent on insurance.

Lawsuit protection involves the use of one or more different entities which can protect valuable assets from creditors and judgements.  Proper use of an FLP is a very effective technique. This entity is set up as a limited partnership with special provisions to provide the asset protection features.   In some cases a corporation can be designated as a general partner.

 In using an FLP all personal and business assets are placed into this partnership. The family house, bank or brokerage accounts, and other real estate investments will be transferred into the partnership. Multiple partnerships can be set up to hold substantial and diverse investments.

These techniques are very effective, because in the event of a lawsuit or a judgement, any creditors generally will not be able to reach inside the partnership and seize any of these assets. Under California law, and the law of most other states, a creditor has no right to execute or levy on partnership assets with a judgment against one of the partners.  This rule also applies to Limited Liability Companies. This provision is contained in the California Corporations Code.

 Under the proper circumstances, the ONLY remedy that a creditor can use is called a “charging order”.  See Evans v. Galardi (1976) 16 Cal.3d 300, 310.  If any cash is distributed to a person by the partnership, the creditor can take that cash to satisfy the judgement. If no distributions are made to that person, the creditor receives nothing.

 The partnership can sell assets and retain or reinvest the proceeds but if no money comes out to that person there is nothing for the creditor to take. A creditor cannot take a person’s interest in management and control of the partnership and cannot take any of the assets in the partnership. Also the creditor may be subject to tax on any income allocated on the partnerships tax returns. The slang term for this is “shark repellent.”

If properly structured, the FLP can provide an entity to protect the assets of individuals, couples and families from the claims of creditors.

Assuming that the transfer of the assets to the FLP was not a fraudulent conveyance under State law, the ability of a creditor of a partner or member to reach the assets of the FLP is severely limited.

(i) The creditor can only become an assignee of the Partner’s interest.

(ii) The creditor would not be entitled to exercise any of the rights or powers of a partner.

(iii) The only result of the assignment would be to entitle the assignee to receive the distributions and allocations of profits and losses to which the assignor would be entitled.

(iv) This places the creditor in a relatively poor bargaining position vis-a-viz the FLP and may make it possible to repurchase the interest from the creditor at a steeply discounted price.

(v) The partnership agreement can provide that the FLP (or its partners) have the option to purchase the interest of a partner in the event the interest is seized by or otherwise transferred to a creditor utilizing extended payment terms, in some cases 15 years or more (see the sample FLP below, in the event the option is exercised.)

With many people so concerned about frivolous lawsuits the use of an FLP in California is a choice that growing numbers of people, especially ones who have accumulated substantial assets, are using.

Attorneys or parties in California who would like to view a portion of a sample Family Limited Partnership Agreement sold by the author which contains the option mentioned above can see below.

 

Attorneys or parties in California that would like more information on a super litigation documents package containing a sample California Family Limited Partnership Agreement as well as over 200 other sample legal documents for California and Federal litigation selling for only $299.99 can use the link shown below.

Super litigation documents package

The author of this blog post is a freelance paralegal and entrepreneur who has worked in California and Federal litigation since 1995.

If you enjoy this blog post, tell others about it. They can subscribe to the author’s weekly legal newsletter by visiting the following link: http://www.legaldocspro.net/newsletter.htm

Copyright 2013 Stan Burman. All rights reserved.

DISCLAIMER:

Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

These materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.

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