incorporate to protect assets?

[retire@40]

A family limited partnership is just a limited partnership of family members.  Whether a creditor can take a limited partnership interest is mostly a function of state law and the states I am familiar with do not provide any special  protection for those interests. People try to draft the agreement in a way to try to prevent creditor attack, but those provisions might not serve to prevent a creditor from seizing the interest, especially if it is the interest of the party who originally set up the partnership.

I read through your later posts and agree that the FLP must have a business purpose even if that business purpose is to earn rental income, interest, dividends, and capital gains.

However, I disagree with you that a creditor can take any assets of a limited partner.  The creditor cannot take anything out of the partnership nor can he step in with any controling powers.  If the creditor wins, he only wins the right to any distributions out of the FLP.  In the case where the FLP is in the business of earning investment income, that creditor would not be able to liquidate any of the partnership assets but would have to pay taxes on phantom income generated by the partnership.

I am basing this on the provisions of the Uniform Limited Partnership Act that is recognized in every state as far as I know.

 

[sailaway]

This may seem complicated but it works for my wife and I

Each income asset/company is held in a separate LLC. Therefore inherant liabilty from each is limited to the that LLC asset and cannot go outside it.

The LLCs are then owned by a Family Limited Partnership. The owners of the FLP is:

1% myself as General Partner
1% my wife as General Partner
49% wife's irrevocable trust
49% my irrevocable trust

This way we each get the lifetime exemption, unlimited marital deduction, total control of income coming out of all of the LLCs which we take as salary, protection from outside litigation, except for our 1% each ownership which we would not take any salary or distribution if a problem arised.

I gues it takes all kinds

 

[Martha]

I read through your later posts and agree that the FLP must have a business purpose even if that business purpose is to earn rental income, interest, dividends, and capital gains.

However, I disagree with you that a creditor can take any assets of a limited partner. The creditor cannot take anything out of the partnership nor can he step in with any controling powers. If the creditor wins, he only wins the right to any distributions out of the FLP. In the case where the FLP is in the business of earning investment income, that creditor would not be able to liquidate any of the partnership assets but would have to pay taxes on phantom income generated by the partnership.

I am basing this on the provisions of the Uniform Limited Partnership Act that is recognized in every state as far as I know.

The Uniform Limited Partnership Act provides that a creditor cannot take assets of a limited partnership to satisfy the debt of a limited partner. Basically, the partnership isn't liable for the debts of the limited partners. It also provides that a creditor of a limited partner can "charge" that partner's interest to pay a judgement, and that the creditor will be treated like an assignee of the partnership interest. This does not mean that a creditor cannot take a limited partner's interest in the partnership to satisfy that partner's debt.

Some states do, however, limit the ability of the creditor to "take" the partner's interest. This is where your charging order comes in. The creditor will get an order of the court requiring any distributions to the partner be paid to the creditor. The creditor just sits and waits or settles with the debtor or other partners.

However, the trend is to allow the liquidation of partnership interests where the creditors judgment cannot be satisfied by the charging order. Because of this trend and the fact you can't be sure where you will get sued and what state's law applies, there is always the risk that a creditor or bankruptcy trustee will successfully obtain ownership of the limited partner interest.

The practical problem still remains, however. Even if the creditor gets ownership of the limited partnership interest, it is going to be hard to force a distribution. There also is the tax risk you mentioned, but I believe all the LPs will suffer the same consequence. Nevertheless, a determined creditor or trustee will likely be able to squeeze something out of the partnership interest.

It is worse for the debtor if the debtor is both the general partner and a limited partner. Say dad sets up a FLP. Dad is the GP and is a LP along with his kids. Dad ends up in financial trouble and files bankruptcy. As trustee, I would step into his shoes as GP and force a distribution to the LPS.

To protect himself, Dad might have formed a LLC to hold the general partner interest. This makes my job tougher but not neccessarily impossible. Dad files bankruptcy. His LLC is property of the bankruptcy estate. As trustee, I take action as the member of the LLC to cause the LLC to cause the GP to order a distribution to the LPs. It starts getting hard if the LLC has a number of members.

Martha

 

[Martha]

This may seem complicated but it works for my wife and I

Each income asset/company is held in a separate LLC. Therefore inherant liabilty from each is limited to the that LLC asset and cannot go outside it.

The LLCs are then owned by a Family Limited Partnership. The owners of the FLP is:

1% myself as General Partner
1% my wife as General Partner
49% wife's irrevocable trust
49% my irrevocable trust

This way we each get the lifetime exemption, unlimited marital deduction, total control of income coming out of all of the LLCs which we take as salary, protection from outside litigation, except for our 1% each ownership which we would not take any salary or distribution if a problem arised.

I gues it takes all kinds

Sailaway, are you a beneficiary of your or your wife's irrevocable trust? If so, I might consider as a bankruptcy trustee an attack on your FLP if you personally filed bankruptcy. I would take the GP interest and try to force a distribution to beneficiaries of the trust. If you were a beneficiary, that distribution would go to the trustee.

The LLC idea is great because it minimizes your risk of personal liability and with all these layers of complication, most would stay away.

Martha

 

[Martha]

I remember a business owner in MI many years ago who owned a business that began to go under. This owner created a new business and borrowed all the remaining money in the going under business. He kept the gone under business alive in name only. When his second business failed and he claimed bankruptcy, the rules said he had to pay back his debts as he could. The second companies' first debt, and therefore the one that got paid back first was the debt to his former company. This stategy saved his ass. this is how I heard it anyway.

I've read some things about equity stripping and cross-collateralization. feelings on these?

TC

I am not quite sure what happened with the Michigan business, but it sounds similar to what we call a corporate shuffle. A business is in trouble, it "sells" its assets to a new entity formed by the same owners. The sale price is the agreement of the new entity to assume secured debt. Secured creditors consent to the sale and allow the new entity to assume the debt. Trade creditors are stuck with nothing. Sometimes this strategy yields fraud claims by those creditors.

Equity stripping and cross collateralization? Don't get me started.

Martha

 

[smooch]

From Bob_Smith:

So Martha, what can a married couple do to minimize the risk of creditor's seizing assets besides continuing to hold assets in 403(b)s and 401(k)s?

My understanding is that 403(b)s and 401(k)s are NOT protected if one spouse is in need of long term care. Is there a way to protect the 403(b) of the healthy spouse?

 

[TallCotton]

Hi, I originally asked this question because I'm worried about ER without having medical benefits. I mean I'm going to pay premiums for self insurance, but somehow iI think if I really looked into the plans closely they would in actuality be stripped down things that when something really serious happened I wouldn't be covered.

The first five years of my ER plan calls for me to survive with the distributions from a couple of IRAs' and cash savings. I would be driveing a paid for truck and living in a paid for home. I would have a couple of other important assets (property.) But extra cash, no.

I worry if I get sick and end up in the hospital for a while and run up a load of bills and need long term care or something that I would not only be losing my health, I would also lose my house, truck, properties and maybe they'ld go after my pension and who knows what else.

Now, I've paid my bills all my life, but y'know, I have to admit I would sleep fine knowing I could skate around a couple of hundred thousand, or more, in bills owed to an insurance company. I've probably given them a million over the last 30 years.

So, if it meant I had to own my retirement home, and vehicles through seperate LLCs' inside an irrevocable trust, then so be it. As long as it would stay my roof over my head till I die, and I still had an income to keep the heat and lights on I could care less if some big corporation get shafted while I do it. I know they would do the same for me...

So I seek clues on how to hide my assets.

T "human resource" C

 

[Bob_Smith]

Martha, thank you!

 

[Bob_Smith]

From Bob_Smith:

So Martha, what can a married couple do to minimize the risk of creditor's seizing assets besides continuing to hold assets in 403(b)s and 401(k)s?

My understanding is that 403(b)s and 401(k)s are NOT protected if one spouse is in need of long term care. Is there a way to protect the 403(b) of the healthy spouse?

Smooch, the only ways I know to cover LTC are to buy insurance, self-insure, or qualify for Medicaid. I chose to buy insurance and pay it off in one lump sum.

 

[BUM]

Don't go bare on insurance unless you have nothing to lose
Don't guaranty the debts of your children
Don't be enticed by the pleasures of gambling
Don't borrow money from your retirement plan
Pay your taxes no matter what
Pay your child support no matter what
Pay your credit cards in full each month
Pay off your house
Live below your means
If you are a risk taker, try to position yourself so you don't take your family down with you if things don't work out

This is pretty much how we live our lives in the BUM family, clueless grown children not included. Nearly all the risk I've shouldered over the years has been borne by my S corp. (healthcare related). As the activity winds down, my spirits wind up! Living under the daily threat of a possible lawsuit is troublesome enough even with liability coverage.

As ER unfolds I'm hoping that living by Martha's Ten Commandments will keep the wolves lunching elsewhere.
The S corp remains open however and pays for group health insurance benefits.

Thanks Martha

confession - Last week I broke commandment #3. I shamefully put a lottery ticket in my wife's birthday card.... mea culpa.

BUM

 

[Martha]

Lawyer cya coming

I feel the need for a little CYA. Making decisions about how to hold assets has a lot of factors. There are practical issues, tax issues, estate planning issues and creditor protection issues. This thread has only touched on a few. Each person's situation is different so no decisions should be made based on what we talk about here. Instead, you can take some of these ideas or concerns and talk about them with your own lawyer. We can only paint with a broad brush here and talk in generalities that might not apply to anyone's specific situation.

The general thrust of my comments has been that little of what you do is absolutely bullet proof and if you have significant assets, there is an incentive for an attack by an aggressive trustee or creditor.

EDIT: Another issue to emphasize is that the law is always in flux. Legislatures amend exemptions. Courts interpret them. Trustees find ways to attack. What is true today is not necessarily true tomorrow. The same is true with estate planning. Especially if you do sophisticated planning, you need to talk to your lawyer every once in a while to update that planning based on changes in the law.

 

[Martha]

So, if it meant I had to own my retirement home, and vehicles through seperate LLCs' inside an irrevocable trust, then so be it. As long as it would stay my roof over my head till I die, and I still had an income to keep the heat and lights on I could care less if some big corporation get shafted while I do it. I know they would do the same for me...

So I seek clues on how to hide my assets.

T "human resource" C

Keep in mind the need to talk to your own lawyer about these issues as your lawyer will ask all the necessary questions and help determine a plan for you based on your situation. A lot of your issues will depend on what state you live in. Are you in a state that provides broad protection for your home? What kind of pension do you have? What types of protections does your state provide for that pension? Often defined benefit plan type pensions have broad protections. IRAs are all over the board and there is a lot of litigation concerning exemptions in IRAs. ERISA and the supreme court have provided fairly broad protection for ERISA qualified plans, such as 401(k)s.

Once you know what is exempt, then you can think about whether there is any suitable way to protect the non-exempt assets which have signficant value.

 

[John Galt]

Slightly off topic. I have not used any asset protection planning yet, partly because it's a low priority right now
and partly due to the cost of hiring a "pro" to help.
However, to illustrate the differences which may exist
in state laws...................I am still battling over the court
order requiring me to fund a significant (to me) portion
of my youngest daughter's very expensive college
choice. In some other states I would have no obligation
whatsoever after age 18. I really got hammered on that
one.

JG

 

[Martha]

My understanding is that 403(b)s and 401(k)s are NOT protected if one spouse is in need of long term care. Is there a way to protect the 403(b) of the healthy spouse?

Smooch, ERISA doesn't protect your retirement plan from claims of the IRS and claims of a divorcing spouse under a qualified domestic relations order. But even though a creditor might not be able to actually take money from the 401(k) or 403(b), you won't get public assistance until you spend certain of your assets down, whether or not those assets are exempt from creditors. So you are stuck having to use the retirement money for long term care .

Planning to move all your assets to the next generation so that you are eligible for Medicaid is a very very dangerous area.

As Bob said, long term care insurance. This insurance seems best for those who don't have quite enough to finance long term care with their own assets, but yet have enough assets to have a lot to lose if they had to pay for nursing home care.

 

[sailaway]

To Martha Re: assets owned as LLCs owned by FLP owned by irrevocable trusts

Each irrevocable trust is taylored only to that spouse alne without mention of the other. In addition there is an arms length distance by each trustee to that trust to maintain the independence with creditor protection guidlines built into the trust documents.

Sailaway

 

[wzd]

I'd be curious to know the facts upon which you based your conclusion.

It was a few years ago, and I'm afraid that I did not keep notes. Just went with a friend to a sales pitch meeting by someone selling FLP setup packages (and the same person was also giving a Carleton Sheets type real-estate presentation). Also, no pretense to a valid search is done, I was more browsing with a bias looking for exceptions and negative info, based on prejudice from the second presentation.

I looked up info both online, and at the CU library. There were cases where the FLP was dissolved, and with contempt sentences in the library, and some statements online about the vulnerabilities of them for creditor protection. The ability to pass assets over time to heirs (in excess of normal gift rates) did seem to be valid, and that is also true for simple LLC's (which I think can have voting/non-voting shares).

Yes, it does make things harder, but it did not seem to make them impossible. So, maybe not a professional conclusion, but that's where I ended up. As Martha said above, there are approaches to break the protection.

Thanks for jumping in Martha - and you really jumped in! It's interesting to read how uncertain some of this really is.

BTW: maybe info on how to do those sales presentations should be in the "Make money fast with no work and no brains" section. I was amazed to see some people with checkbooks and credit cards out at the end of the spiels! Spending thousands of dollars each! Maybe they had done their research ahead of time

Wayne

 

[wzd]

...If I understand what I've read the advice I am given is to get an umbrella policy to give those creditors something to get instead of my house and other assets.
TC

I think the umbrella policy protects against liability, i.e. lawsuits, and not creditors in general (such as those for medical expenses).

Wayne

 

[wzd]

Keep in mind the need to talk to your own lawyer about these issues as your lawyer will ask all the necessary questions and help determine a plan for you based on your situation.

One thought for those going to retain a lawyer for any reason that is at all complicated: DO YOUR HOMEWORK. Often the legal advice can take a very short amount of time (and $$), but the education and Q&A part can eat up several times that. So for wills and trusts, go read a good book on them first and be sure you understand the basic terminology. For divorce, plan out the details and have them review it. In other words, plan ahead of time and make the best use of the lawyers time.

On the other hand, if you are short on time, and have plenty of money (or if you are Martha's client ), feel free to ignore the above suggestion.

Wayne

 

[smooch]

Martha_M,

Thankyou so much for your response. We have talked to several lawyers and what frightens me is that they give different advice. The lawyer who did our wills told us that the 403(B) of the healthy spouse could not be counted for Medicaid eligibility of the spouse in the nursing home. I know from the reading that I have done that that is not true. A tax advisor told us that he had never heard of Medicaid taking the 403(B) of a healthy spouse. So I am reluctant to pay $500 for another set of wrong advice.

As far as LTC insurance, from a thread on this board, I found the Consumer Reports article that said it has many flaws. So I don't know if that is right for us either. We are 59 and 55 and have about 850K in 403(b)s and IRAs and I am so worried about losing it all, except for $92,000 allowed in Maryland this year. It seems that we will have to keep working until we have 2 million, which is the amount that I've read that you need to self insure. At least we have good health and good jobs!

 

[wzd]

Divorce to protect assets?

I have heard of people getting divorced to protect assets, but don't know of any. I think you give up something taxwise also...but am not sure. Anyone have more info on this?

 

[Martha]

Just a quick visit this morning because I have a hearing to prepare for.

Smooch, to expand on the medicaid issue, I didn't really expand on it much because there are many complications, as I emphasized in a prior post. Different states have different amounts required to be spent down from the spouse not in the nursing home. So you have state variability. Also, I think, but I am not sure because I haven't looked at the issue for a while, that if you are still working and your spouse is in the nursing home, you might not have to liquidate your 401(k) or 403(b) because the asset isn't considered available to you. However, if you retire it may be considered an available asset and will be considered in the spend down formulas. I also think, but am not sure because I haven't looked at it for a while, that if you are retired and over 70 and a half, your retirement plan is treated like income and you might have to use part of the monthly distributions to pay for care, but won't have to liquidate the plan. There may be state variabilty on these issues as well. EDIT: Yup, there is state variability on how retirement resouces (of the person not getting medicaid) are treated.

So you can see the issue can get muddy.

Wayne, as far as getting a divorce, there as always are issues, such as competency, possible obligations to provide support and fair division of assets. I once represented a trustee in bankruptcy. The debtor had a lot of debt from a failed business. Before he filed bankruptcy he got a divorce. His wife got most of the assets. She didn't owe the debt. I sued her on the grounds of fraudulent transfer and settled for a a significant sum. I probably wouldn't have sued her if she had received only half their assets.

 

[wzd]

Martha - I was thinking of the long term care/medical bills issue. Half is probably better than some of the scenerios described here for asset spend down for spousal nursing home care. There is also an emotional aspect to it, but if I were to need long term care for Alzheimer's, I would rather be divorced than to force my wife into the poor house.

Long term care insurance is the defensive mechanism needed here, but for those that wait too long, it really sounds like they are screwed.

Wayne

 

[Bob_Smith]

Long term care insurance is the defensive mechanism needed here, but for those that wait too long, it really sounds like they are screwed.

I agree with Wayne.

Smooch, you seem to be saying that you will keep working until you have $2M so you can self insure for LTC. Before doing that, why not buy LTC insurance? I'm not sure if it's doable anymore, but 2-3 years ago my wife and I bought policies and paid them off in one lump sum. Total for both was $35,000. Like you, we felt LTC was a piece of the puzzle we needed to address. LTC isn't for everyone, but for some it's very good to have, IMHO.

 

[smooch]

From Martha:

if you are still working and your spouse is in the nursing home, you
might not have to liquidate your 401(k) or 403(b) because the asset
isn't considered available to you.

Thankyou again, Martha. You brought up some interesting possibilities,
like the one above. We are both still working - just thinking ahead. I'm
going to look into the rules about your above statement in our state.

Bob Smith,

I want to buy LTC insurance, but my husband is not convinced, given that we've read many articles saying that the insurance companies won't be able to pay when the time comes. I am continuing to research the issue. Just looking at all of our optiions.-

 

[TallCotton]

Hi all and thanks for everyones onput on this subject. It's especially great to have Marthas' expert advice along with everone elses personal experiences in this area. Thanks again.

I am seeing how complicated this all is, and how area specific it all can be.

But, I need a plan and help with it:

I'm leaving from my home here in Las Vegas to go to Michigan on April 5th. I'll be there for 3 weeks. It is my intention to purchase, with cash, a piece of property to build my future retirement home on. The home will be paid for also as it is built.

I need to know if I should create an LLC now, in Nevada and have the LLC purchase the property. The property will be my primary residence and I don't know the homestead type laws there as far as how exempt this asset would be from creditors under existing Michigan laws.

Also, If the LLC owns the property, I would be living in, or "renting" an asset owned by a corporation in Nevada.

I wish I lived with a lawyer and a CPA and a financial planner and...

TC