Family Limited Partnerships and the IRS
It is very difficult to put property
into a situation that can protect it from IRS seizure. However, there is one method that can make it very difficult
for the IRS to get property. A Family Limited Partnership is an entity format that has considerable potential.
A limited partnership is a partnership formed by two or more persons under a limited partnership statute. In a limited
partnership, the limited partners provide the capital. The general partners run the businesses and are liable for the
debts of the partnership.
In jurisdictions that have enacted the Uniform Limited Partnership Act, a judgment creditor of the limited partner may get
a charging order from a court against the limited partner's partnership interest. Generally, however, the charging
order is the exclusive remedy of the creditor. The charging order does not give the creditor title to the limited partner's
interest in the business. It gives the creditor of the limited partner, the right to receive limited partnership income
and on dissolution, the limited partner's share of partnership assets. Generally such a sale is not very lucrative
for the creditor.
A
Family Limited Partnership is an especially valuable entity, because it can provide both asset protection and estate planning
advantages. The Family Limited Partnership situation requires that there be a familial relationship between the partnership
members. They must be related by marriage, ancestry, or lineage. In other words the partnership may include grandparents,
children and grandchildren. The partnership must have a business purpose and a legitimate business activity. Check out IRC
704(e) which provides some restrictions as to the types of income that a Family Limited Partnership can earn. Essentially,
the partnership must get its income from a capitol investment.
Once the Family Limited Partnership is formed, individuals concerned about judgments
can structure their ownership to a minimal percentage. For example, the individual needing judgment proofing could be a general
partner with a 1% ownership, the children could be the limited partners with a ownership of 99%.
In this kind of a situation, theoretically, the
IRS could not seize the partnership assets for an assessment against a partner. The IRS would have to get a charging
order. Since the general partner can decide not to distribute any profits, it would be very difficult for the IRS to
get anything.
If you are
on the front lines of the Freedom Movement and you have assets, you may be in a difficult situation. You might consider
the formation of a Family Limited Partnership. It certainly seems a better place to be than on your own.
