What asset protection does a Limited Partnership provide?
As stated in the preceding chapter, Limited Partnerships offer significant asset protection opportunities. Limited partnerships provide such asset protection because of the way the laws that govern partnerships treat partners and partnership assets. As you will recall, limited partnerships have two kinds of partners, each with dramatically different roles and responsibilities. General partners manage the partnership, and thus have full responsibility and control.
Limited partners, on the other hand, have little, if any, input into the running of the partnership; therefore, they are not held responsible for its management or any liability it might create. No one would want to become a limited partner without this protection. The law is designed to encourage the creation of partnerships and the economic benefits they produce for society.
The second important feature of limited partnerships is that assets titled in the name of the partnership are deemed the property of the partnership itself, not that of the individual partners. The legal importance of this arrangement is that partnership assets are shielded from creditor claims against the individual partners. In other words, a creditor cannot force the sale of assets owned by the partnership to satisfy a judgment against one of its members. Instead, such creditors are entitled to attach only the member’s individually owned assets and to receive any distributions made by the partnership to that member.
To achieve asset protection with a Limited Partnership, you would transfer individual assets (real estate, business interests, investments, artwork, etc.) out of your personal name and into the name of the Limited Partnership. A common arrangement would be for you to become a one percent general partner, giving you the right to fully control and manage property just as before. You would also become a ninety-nine percent limited partner, entitling you to receive income from the partnership, but shielding your limited partnership assets from creditor claims. For the greatest asset protection, most individuals who use Limited Partnerships transfer part of their limited partnership shares to others, usually family members. This shows that the partnership has legitimate business purposes other than just defeating creditor claims and makes them more likely to survive a court challenge. Because Limited Partnerships can provide significant tax advantages, as well as asset protection, it is often an ideal strategy to use when an individual wants to pass wealth, especially a business, to other family members.
Sometimes a Limited Partnership alone isn’t enough protection against possible lawsuits or creditor actions. That’s when an Offshore Trust becomes an important tool in the asset protection toolkit.