How to divide & conquer with your asset protection plan
Each category of assets should have it’s own “container.” You should never mix liability-generating assets (like an apartment, house or stock in a privately-held business) with an investment account.
For example, if an apartment house is in the same entity as an investment fund, a simple slip and fall at the apartment could endanger the entire investment fund.This is not usually true if they are owned by separate entities in a properly structured plan.
This is why you should sometimes use a Family LimitedPartnership underneath an asset protection trust to separate ownership.
I discuss this in greater detail in Chapter 5 of Asset Protection in a Nutshell. An asset protection plan with multiple investment assets (e.g., an apartment and a stock portfolio) will use multiple limited partnerships to divide and conquer.
Family limited partnerships (FLP) are just simple limited partnerships, which have been renamed. A partnership, is a partnership, is a partnership.
The main purpose of a partnership in an asset protection structure is to separate ownership from control. The general partner (you) exercises 100% control over the assets held in the partnership. It is common to give the general partner 1% of actual ownership and 100% of the control.
At the same time, the limited partner (which is often the asset protection trust) will have 99% ownership and NO control at all.
A partnership is normally only necessary when there are multiple categories of investment grade assets such as an apartment and a stock portfolio. Many practitioners have touted family limited partnerships as an asset protection vehicle citing the decades old charging order protection” offered by all partnership statutes.
Charging order is a statutorily means for a creditor of a judgment debtor, who is a partner of others, to reach the debtors beneficial interest in the partnership without risking dissolution of the partnership.
However, in many states, charging order protection is being done away with due to ever increasing abuse. It’s my belief that charging order protection is not enough, and I do not think Limited Partnerships (and for that matter Limited Liability Companies) can provide material asset protection. They are best used for separating ownership from control.
Don’t put all your eggs in one basket.
Today, I take on the simplest rule, but almost always the least respected rule. Here it is. Divide and conquer. By this I mean, never put your priced investment assets into the same entity. Let's say you own two apartment houses and a savings account. You would never put both apartment houses into the same LLC. If you have both apartments in a LLC and out of the blue you have a slip and fall and it's uninsured, the injured person will soon get a judgement to take both of your apartments away from you.
However, if you’d structured things differently, following the rules I’ve laid out, you would have had two entities; one for each apartment house and in fact, you’d have a third one for your savings account. These entities might all be owned by the same holding company, often its a family-limited partnership. Entities are often LLC’s but it doesn’t matter, any entity is fine.
Sometimes you should use a corporation. Lots of different entities can be used, but you never mix your liability and your valuable assets into the same bucket unless there’s a specific reason to do so. Divide and conquer. I tell all my clients, if a deal is important enough for them to do then it's important they spend the $500 to $1,000 to form a simple LLC- that’s if they don’t need any help.
If they need help, it can be about $2,000-$3,000. But it's simple, it's always easy to form a proper entity and divide your liability while containing it within the walls of an entity. I don’t believe that LLC’s or family-limited partnerships or corporations are all that good for asset protection entity standing alone, but you should still always use them. Never ever fail to separate your eggs into different baskets. By different baskets, I mean different entities. That’s why when there's a disaster with one entity, you have a much larger chance at being able to keep the others.