 |
Part 2: Asset Protection: General/Limited Partnership, Corp Chapter |
|
Top Domain 500Mb Webspace - $5
24/7 online support Reseller Control Panel.
Author: Rocco Beatrice Article source: http://www.articlealley.com/. Used with author's permission.
PART 2: ASSET PROTECTION: GENERAL/LIMITED PARTNERSHIP, CORP CHAPTER "C"/CHAPTER "S", LLC, TRUSTS
THE CONCEPT OF ASSET PROTECTION includes the possibility of placing title in certain assets in the name of a less vulnerable spouse or other family members, or a legal entity. One should be very attentive in transferring title without an open invitation to a "fraudulent transfer" claim against the asset transferred as a result of the possibility of death by the spouse or a family member, or the possibility of a dissolute marriage, or even a court judgment.
Fraudulent conveyance has to do with transferring assets at less than the "fair cash value" thereby defrauding a potential creditor or the intentional divesting of assets which become unavailable for satisfaction of a lawsuit. Fair cash value means cash or near cash value at the time of transfer, not the price you paid for the asset. Example: you transfer your portion of your equity in your home to your wife for $100.00 and the fair cash value of your portion of the equity was $250,000 or you transfer title to your car to your brother for $10.00.
The most common methods of holding assets by INDIVIDUALS:
- Joint Tenancy
- Joint Tenancy with right of survivorship
- Tenants in Common
- Tenancy by the Entirety
- Community Property
(Read part 1 "Asset protection with Joint Tenancy, Tenancy in Common, Tenancy in Entirety & Community Property")
LEGAL ENTITIES (Artificial person created by application of law):
- General Partnership
- Limited Partnership
- Limited Liability Company
- Corporation under Chapter "C"
- Corporation under Sub Chapter "S"
- Revocable Trust (There are many Revocable Trust variations, since a Trust is nothing more than a Contract)
- Irrevocable Trust (There are many Irrevocable Trust variations, since a Trust is nothing more than a Contract)
GENERAL PARTNERSHIP
A General Partnership is an association of individuals, collectively owning property or a business relationship of a collective group of individuals acting as a business unit/enterprise as a going business concern.
The worst way to hold any asset or to do business as a partner is a General Partnership. In my opinion, there's absolutely NO advantage, whatsoever. It's all negative. Each member of the General Partnership is liable for all potential liabilities of each of the other partners. In other words, an employee of the General Partnership causes an accident while on company business. Each of the Partners individually can be held 100% liable. The deeper pocket theory is he who has the most to lose will lose the most. NEVER do business in General Partnership or become a partner of a General Partnership.
LIMITED PARTNERSHIP
Limited Partnership is one or more General Partners and one or more Limited Partners. The General Partner(s) controls all actions of the partnership. The Limited Partners are the silent partners; the Limited Partners have no control. In certain cases the Limited Partnership has significant asset protection and tax advantages.
For example, in a Family Limited Partnership the Parents take the responsibility of day-to-day management as a 2% General Partnership (each Parent 1%) and retain 98% as Limited Partners. In each of the subsequent years, each of the General Partners (the Parents) gift each of their children an excluded gift tax amount of $12,000 (for the taxable year beginning 2006 and thereafter). Over time, the children will have a 98% interest in the Family Limited Partnership. However, the control of the Partnership remains in the hands of the General Partners (i.e. the Parents). This is a noteworthy tax-efficient way to transfer wealth from the Parents to their children tax-free.
Another tax advantage for Estate Taxes is the valuation of a minority interest as a Limited Partner due to lack of control or ability to sell a minority interest. A Limited Partner is a "Silent Partner" in the management and control and therefore, the Limited Partnership Interest has a discounted value, generally up to 40% as a minority interest, depending on the nature of the assets. Additionally, the Limited Partnership interest has a discounted marketability, up to 40%. Combined, minority interest and lack of marketability, for estate tax purposes it can be argued that the fair cash value of asset is diminished by as much as 80%. Aggressive? The IRS considers this type of discounting abusive.
For asset protection purposes, the Family Limited Partnership, for decades, has been considered the Cadillac of Unites States asset protection systems. By definition a Partnership is considered to be two or more persons.
ON FAMILY LIMITED PARTNERSHIPS
The more commonly recognized advantages for the Family Limited Partnership are:
1. Family Limited Partnership Asset protection. The creditor may not step into the shoes of the "Partner." The only remedy for the creditor is the "charging order" obtained subsequent to litigation and judgment in favor of the creditor. A creditor who obtains a charging order is therefore liable for Federal Income Taxes on their pro-rata share of the partnership income even though the creditor may never be able to receive or collect the income. A major detriment to the creditor.
2. Family Limited Partnership on Reduction of Federal Estate Taxes. You can make a lifetime of gifts under the gift tax rules ($12,000 for 2006 and forward) and still retain all the control.
3. A reduction in taxable estate tax valuation by application of discounting for lack of marketability and minority interest.
The negative of Limited Partnerships is the "General" Partnership interest. If the General Partner loses a frivolous lawsuit to a creditor...the creditor controls the Partnership. The other negative is that Partnership interests go to Probate and are includible assets for the Estate Tax. This problem can be avoided if the "General Partnership" interest is owned by an Irrevocable Trust.
LIMITED LIABILITY COMPANY
The LLC is a hybrid "pass-through" legal entity similar to a Partnership but with the limited liability of a Corporation.
For "Income Tax purposes" income and expenses of the LLC "pass-through" directly to form 1040 income tax return proportionate to the percentage (%) of ownership, or if there is more than one member, to a percentage (%) unrelated to the ownership percentage (%), i.e. 50/50 or 75/25 etc. irrespective of the equity ownership %. This is a significant advantage over other forms of entities and it's the only entity that allows this departure.
The LLC also has another significant advantage; members decide how they want to be taxed, i.e. sole proprietor, partnership, or corporation. The LLC will obtain it's own Federal Identification Number (similar to a social security number) to operate as a business, and maintain it's own bank account.
For "Asset Protection purposes" the LLC is creditor proof. Creditors cannot step into the shoes of the LLC. The sole remedy of the creditor is a "charging order" against the members, unenforceable against the LLC, similar to the Partnership, described above.
The legal characteristic most interesting to the business world is undoubtedly the limited liability status of LLC owners. With the exception of corporate entities, the LLC is the only form of legal entity that lets all of its owners off the hook for business debts and other legal liabilities, such as court judgments and legal settlements obtained against the business. Another way of saying this is that an investor in an LLC normally has at risk only his or her share of capital paid into the business.
Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert. 71 Commercial Street #150 Boston, MA 02109 toll-free: 888-938-5872
Watch a FREE video & learn how you can reduce your taxes, protect your assets & secure your privacy. Free consultation. No Obligation, no risk, no sales pressure. Read more articles on: Irrevocable Trusts, Asset Protection, Medicaid, Estate Planning, Part 3: Asset Protection: General Partnership & Corporation
FREE Glucose Meter and FREE home delivery of diabetic testing supplies. 
| 
Print this page