Steve Novak: FLP for Asset Protection in Utah

We’ve previously talked about family savings trusts and compared an FLP and LLC here and here.

If you’re wondering whether an FLP (Family Limited Partnership) will really work for asset protection, then you really must first first understand what Asset Protection is. In the most basic sense, Asset Protection is any action that dissuades or disallows any unwanted and unauthorized person or entity from reaching your assets. That’s really it.

In that sense, Asset Protection could include:

Giving your assets away to a charity or person.
Losing your assets in Utah.
Investing your assets in a copper mine in South America, which turns out to have no value.
Placing your assets in an unreachable location, like a treasure chest dropped to the bottom of the sea, or
Piling all your assets up and making s’mores over a roaring bon fire.

In each of the above cases, the assets would be difficult, if not impossible, to reach for anyone! The problem, of course, is that anyone includes you. In practical terms, what Asset Protection has come to be known as is slightly different than these methods mentioned above.

Legal Asset Protection is the use of legal entities and tools that place a legal barrier between an unauthorized creditor and your assets, while leaving you in the position of being able to control, use and enjoy those assets.

From this perspective all of the above options are out. What’s in is the Family Limited Partnership and its cousins like the far more powerful Asset Protection Trust. So how does the FLP really work to protect your assets?

The properly utilized FLP is a legal entity drafted under the laws of a state that statutorily does not allow a creditor to reach the underlying assets of one of the FLP members. It does this with one very special feature – The Charging Order.

A Charging Order Against an FLP

The Charging Order is a legal concept and in the words of the Statute itself:

“A charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership.”

The key concept here is lien. If all things go well, a creditor would not be able to force a distribution of the partnership assets and would be left sitting there with just a lien. This has the effect of placing the barrier we want between the assets and a creditor who is after them.

What the charging order, and the FLP in general, does NOT do is completely remove the creditor; rather it just makes them wait. The net effect is that a creditor holding a charging order is likely to come back to the negotiating table and accept an offer of settlement that is far more favorable to you than it would have been had the creditor been able to directly reach your assets.

Is this Asset Protection? Yes, it does accomplish the goal of placing a barrier, while still allowing you to control, use and enjoy those assets, at least to a point. However, it is not an ultimate barrier. If the creditor is not motivated to settle, and is willing to wait it out, they are in line to receive any eventual distributions from the partnership. In the meantime, you are deprived of your use and enjoyment of those assets. It basically creates a face-off.

So when is an FLP enough? Basically that depends on the level of protection you desire and the level of assets you are trying to protect. Our experience has shown that if your asset level is below $250,000 the FLP alone is a good strategy. When your assets begin to climb higher than that, and definitely when the reach the $500,000 mark, we have found that the deterrent effect of the FLP alone is just not enough.

The reason is obvious, the more the money, the more incentive a plaintiffs’ attorney has to either wait it out, or worse yet, attempt to break open the FLP. The later can and does happen and anyone familiar with a courtroom will tell you that judges are highly adept at finding ways around the very rules and statutes they are meant to uphold. Why? Because there are always 2 sides to every story and more than one way to read the statutory intent of a law.

For these reasons 90% of the time I do not rely solely on the FLP for real Asset Protection. While it remains a valuable entity, particularly for the consolidation and management of all the assets, when it comes to real deterrence and protection I rely on the far more powerful
Asset Protection Trust, which is the key to a great estate and asset protection plan.

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