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LLC | LP | Corporations | Pension Plans, IRAs, Or Any Self Directed Retirement Fund | Real Estate, Personal and Investment | Irrevocable Trust | Triangle

The Asset Protection Triangle

The concept of protecting one's assets is the method used to protect your lifestyle for a lifetime. True asset protection is achieved by structuring one's assets so, NO ONE or entity, other than those you have pre-selected, can ever touch those assets.

Basic Asset Protection

The basic asset protection device used in our asset protection planning consists of:

  1. A Limited Partnership (Family Limited Partnership),
  2. A Limited Liability Company to act as the General Partner of the partnership,
  3. A trust to act as the majority owner of both the LP (FLP) and the LLC.

Limited Partnership (Family)

Let's look at the advantages of the Limited Partnership.

  1. Partnerships have been in existence for as long as this country has been in existence. In fact formal partnerships can be traced back for almost 1,000 years.
  2. Any type of entity or person can be a partner in a partnership so long as there are two partners. Any two of the following qualify to be a partner: person, corporation, partnership, trust, limited liability company, non resident alien, international entity, charity, foundation, and an ESOP.
  3. A Limited Partnership can have as many partners as is manageable. Sub "S" Corporations are currently limited to 100 stockholders.
  4. Tax Neutral - Partnerships are a pass through or transparent transaction for tax purposes. At the end of each year a partnership files a 1065 form and each partner is given a K1 for their share of the partnership's loss or profit.
  5. Disproportionate Distributions -Partners in a partnership may receive a disproportional share i.e., a share that is a larger or smaller than their ownership share in the partnership's profit or loss.
  6. Gifting Program - A program can be established in a Family Limited Partnership in which partnership interest can be gifted to family members with the General Partner maintaining full control over the partnership business. In addition, the government allows for those interests gifted to be discounted in value. Through the gifting program income can be shifted from those in a high tax bracket to those in a low tax bracket.
  7. The Charging Order - Under the doctrine of the charging order, which is in place in all 50 states, a creditor can not seize Limited Partnership interest. If you're a shareholder in a corporation a creditor can seize your corporate stock. Not only is a creditor blocked from taking possessions of your partnership interest, but the creditor can not force a distribution from the partnership, yet you as a Limited Partner may receive benefits from the partnership rather than a distribution. And if all of this is not enough, there is one more advantage. Under the IRS Revenue Ruling 77-131 a creditor who makes a charging order claim against a Limited Partner interest may be responsible for that partner's taxes on that distribution even though no distribution ever occurred.

So our recommendation for a great basic asset protection plan is:

  1. Limited Partnership (Family),
  2. Limited Liability Company to act as General Partner,
  3. A trust as owner of the Limited Partnership interest in the LP and the non Managing Member membership interest in the LLC. For great asset protection make the trust an Ultra Trust and you now have a double wall of asset protection.

So for all of these reasons and more we feel that the vehicle for operating a business should be a Limited Partnership (Family). Now, however, comes the question who or what is going to be the General Partner. The real draw back to a Limited Partnership is there must be a General Partner. The General Partner in a Limited Partnership is the Manager of the partnership and has total liability for all of the actions and liabilities of the partnership. Therefore, we always recommend that another entity be the General Partner. That is why we use a Limited Liability Company as the General Partner.

Limited Liability Company

A Limited Liability Company combines the advantages of a corporation with the advantages of the partnership. Hence, we form a shell (few assets) to be the General Partner of the partnership. It's the very lack of assets that leaves a creditor with nothing to attack. Yet you as the Managing Member of the Limited Liability Company control the partnership actions. Further, because of language that is contained in the statutes for LLCs, the Managing Member of an LLC can only be held accountable for the actions of the LLC if malfeasance is involved.

Advantages of a Limited Liability Company
  1. Any one or entity can be a member,
  2. No US citizenship or residency requirement,
  3. Can be tax transparent - profits or losses may pass to the members,
  4. No limitations on distribution of profits,
  5. The Charging Order - In all but the following states the charging order is the sole remedy of a creditor: California, Kansas, Nebraska, North Dakota, Pennsylvania and Wyoming and even in those states the Charging Order is respected.

Now the questions become if the LLC is the General Partner of the Limited Partnership who or what is the Limited Partner of the partnership and who or what owns the LLC membership interest other than the 1% owned by you as an individual? Our recommendation is a trust.

A Trust

USE - Estate Planning

The trust can be any of the following -
  • Revocable Trust
  • Irrevocable Family of Trusts -
            Domestic Non Grantor Trust
            Irrevocable Life Insurance Trust
            Multi Use Irrevocable Trust
            Ultra Trust
            Asset Protection Trust.
A Revocable Trust in and of itself offers zero asset protection. But that is not a real concern because the entities owned by the trust in and of themselves may offer asset protection. There is a real bonus in using the Ultra Trust to be the 99% owner of the entity interest. These benefits include but are not limited to the following:

  1. Tax Transparent - An Ultra Trust is a pass through for tax purposes. But if the Ultra Trust is the original owner of the interest then all of the gains in the entity would not be in the client's estate at their death.
  2. Eliminate Probate at the Client's Death - Any trust eliminates probate.
  3. Eliminate Estate Taxes - The Revocable Trust eliminates estate taxes up to the amount allowed under the tax exemption credit and/or the state's estate tax exemption, however, the irrevocable family of trusts normally eliminates estate taxes on everything titled in the trust.
  4. No Loss of Control - Keep in mind that the key to who controls an entity is the person so designated. In a corporation that is normally the President, in a Limited Liability Company it is the Managing Member and in a Limited Partnership it is the General Partner.

We discuss the irrevocable family of trusts on this website.

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