California Family Limited Partnership for asset protection

A California Family Limited Partnership for asset protection is the topic of this blog post.

The asset protection area is a growing area of the legal field due to the fact that California is well known as a very litigious state.

You may have heard the well known lawyer joke which goes, "Why did New Jersey get all of the toxic waste dumps while California got all of the lawyers. New Jersey got first choice."

I have worked in California and Federal litigation since 1995 and have seen things that are astounding to put it mildly.  Many years ago, I worked on a case preparing an answer to a complaint for someone who was being sued because he had performed some work for someone whose house had slid down a hill.  The person being sued was the electrical contractor!  There were so many defendants listed in the complaint that if I had listed all of them on the caption that would have taken almost the entire first two pages of the complaint.  Now that is outrageous!!

While most attorneys are ethical and would never dream of taking on a case like that, some are not so ethical and will gladly file lawsuits just to get some "nuisance money." And many also work with process servers who are unethical to say the least. I once worked on a case where a process server claimed to personally serve someone at a house in California when the individuals had sold the house and moved to Texas over 10 years before, and to top it all off they were at the exact moment of alleged "service" in California on an airplane flight to the Philippines!!

Clearly for certain individuals, especially those with substantial business and/or personal assets, asset protection should be looked upon as insurance.

Asset protection generally involves the use of one or more different entities which can protect valuable assets from creditors and judgments.  Proper use of a Family Limited Partnership (FLP) is a very effective technique. The entity is set up as a limited partnership with special provisions to provide the asset protection features.   In some cases a corporation can be designated as a general partner.

In using an FLP all personal and business assets are generally placed into this partnership. The family house, bank or brokerage accounts, and other real estate investments would be transferred into the partnership. Multiple partnerships can be set up to hold substantial and diverse investments.

These techniques are very effective, because in the event of a lawsuit or a judgment, creditors will generally not be able to reach inside the partnership and seize any of these assets. Under California law, and the law of most other states as well, a creditor has no right to execute or levy on partnership assets with a judgment against one of the partners.  This law applies to Limited Liability Companies as well and is contained in the California Corporations Code.

The California Supreme Court has ruled that, under the proper circumstances, the ONLY remedy that a creditor can use is what is known as a "charging order".  See Evans v. Galardi (1976) 16 Cal.3d 300, 310. 

If any cash is distributed to a person by the FLP, the creditor can take that cash to satisfy the judgment. If no distributions are made to that person, the creditor will receive nothing.

The partnership can sell assets and retain or reinvest the proceeds, however if no money comes out to that person there is nothing for the creditor to take. A creditor cannot take a person’s interest in management and control of the partnership and cannot take any of the assets in the partnership. Also the creditor may be subject to tax on any income allocated on the partnerships tax returns. This fact alone can serve as an effective "shark repellent."

If it is properly structured, the FLP can provide an entity to protect the assets of individuals, couples and families from the claims of creditors.

Assuming that the transfer of the assets to the FLP was not a fraudulent conveyance under California law, the ability of a creditor of a partner or member to reach the assets of the FLP is extremely limited due to several facts such as:

(i) The creditor can only become an assignee of the Partner's interest.

(ii) The creditor would not be entitled to exercise any of the rights or powers of a partner.

(iii) The only result of the assignment would be to entitle the assignee to receive the distributions and allocations of profits and losses to which the assignor would be entitled.

(iv) This places the creditor in a relatively poor bargaining position vis-a-viz the FLP and may make it possible to repurchase the interest from the creditor at a steeply discounted price.

(v) The partnership agreement can provide that the FLP (or its partners) have the option to purchase the interest of a partner in the event the interest is seized by or otherwise transferred to a creditor utilizing extended payment terms, in some cases 15 years or more (see the sample FLP below), in the event the option is exercised.

With so many people concerned about frivolous lawsuits the use of an FLP in California is a choice that growing numbers of people, especially ones who have accumulated substantial assets, are using.

Attorneys or parties in California who would like to view a sample 35 page Family Limited Partnership Agreement sold by the author which contains the purchase option mentioned above can use the link shown below.

Sample California Family Limited Partnership Agreement by Stan Burman on Scribd


Attorneys or parties that would like more information on a super document collection containing over 200 sample documents for California and Federal litigation including a sample Family Limited Partnership Agreement sold by the author can use the link shown below.

The author of this blog post, Stan Burman, is a freelance paralegal who has worked in California and Federal litigation since 1995 and has created over 300 sample legal documents for sale.

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Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

The materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.