Charging Order Protection for FLP’S AND LLCs

Charging Order Protection Video Transcript

Charging Order Protection is a concept that’s used by every Tom, Dick and Harry marketing asset protection to attempt to lure you into purchasing products that oftentimes are ineffective and inappropriate. It's also something I rely upon and use everyday in my business and I’m just going to touch on it briefly right now. We’ll have in depth training on this topic later, but for now we're just getting ready for the cocktail parties.

What is Charging Order Protection

Well, what we know is that charging order protection is on everybody’s marketing brochures saying form an LLC or form a partnership and this will give you complete and total iron clad asset protection. Well, that’s bull.

Charging order protection is a remedy thats provided in the uniform limited partnership act, all the partnership acts, all the LLC, acts by statute. It's a set of rules that limit a creditor’s ability to disrupt the partnership or the LLC and I’m going to go to a book I wrote Asset Protection Trusts (coming soon to full members). This is my first protection book.

It's more than 20 years old and I sold it to Matthew Bender, The Times Mirror Corporation. They paid me some good money for it but it was really my dissertation for my Doctor of Juridical Science at New York University Law School. And, by the way, anybody who takes the major course on the actual, excuse me, actual document preparation will get a copy of this(if you’re a member, soon).

Now, I want to go to page 53. There we go, Charging Orders - Family Limited Partnership. This is interesting material and what I wanted to do is read to you the provision in the law that changes the remedy. This is a good way to start making attractive assets less attractive to a creditor. Now, here is what the rule says:

On application to a court by a judgment creditor, the court may charge the partnership interest of the partner with payment of the judgment.

The judgment creditor has only the rights of an assignee of the partnership interest. Well, what does all that legalese really mean?

What it means is that a general partner, let's just stick to partnerships, a general partner runs the partnership. It doesn’t have to own very much of it. It can own none of it in some States. The general partner is in charge of when the money is distributed by the partnership and the thought was that if you made the debtor, the general partner and the limited partner was the debtor’s trust or just plain the debtor again or one of his other businesses or entities, that the debtor would be in a position to decide when distributions were made. And therefore the debtor could tell any creditor that there would be no distributions, basically delay distributions and a charging order says that the creditor can only get what is actually distributed by the general partner.

So, everybody was all excited that this is putting the debtors back in control of their assets and they could hide behind this statutorily created screen. Tens of thousands of people use this for bad purposes.

Every doctor who is leaving his wife in favor of his scrub nurse would put his life savings into a family limited partnership and blithely go on thinking that his soon to be ex-wife couldn’t touch it and the courts got sick of the abuse. The courts started fabricating judicial remedies or judicial exceptions to the charging order rules and this all started with Security Pacific Bank, a case back in the 70s where the court said a creditor could actually take over the partnership interest and then force the dissolution of the partnership and that’s become the way around this.

And what's happened is there's a lot of law on this and I’m not going to go into it now. I’m going to go into it in great detail later but the bottom line is this is a fragile limitation on a creditor’s remedies. You should not rely upon it. It does not have the strength that I would put my life savings into any entity and rely upon this.

Judges have fabricated exceptions and if they want to make one in your case, you can count on it they will. There are some recent cases that point to situations where two or more unrelated people were in a real business together and charging order protection was deemed to hold up. This is a type of case that it's supposed to be applied to. This is what charging order was for.

If you and I form a doughnut shop, I’m the general partner and you're the limited partner and you put up the money and I do the work and we split profits 50-50 and then my wife divorces me, this remedy was designed to prevent my wife from being able to walk in and decimate our business by forcing all the assets to be distributed. But you know what, don’t rely upon it. Don’t count on it.

Charging order protection is not something that I believe is a safe tool in the long run. With that said, I use partnerships everyday. I use LLCs everyday and I love charging order protection when done correctly. I'll teach you more how in the video lessons soon to come.

Posted in ENTITIES (Trusts, FLP's, LLC's and Corporations).