(This is part of an article that we wrote for the magazine Audiology Today, briefly covering some key topics of sound business structuring – with a few inserts for clarification)
The Charging Order
In an attempt to capture some sort of compensation from the FLPs (Family Limited Partnerships – see the home page of this blog for more info), trial lawyers lobbied for, and passed, legislation in all 50 states that allowed lawyers to go after distributions, or profits, from the FLP that were due to the defendant. This law is called The Charging Order, and despite the fact that it was an attempt to obtain assets from a defendant, in the end, if the FLP is set-up properly, the charging order actually kills all hope of ever getting any money at all. To begin with, the Charging Order concedes that the assets held in the entity cannot be seized through a suit. However, it does entitle the plaintiff the defendant’s share of any income from the FLP when a distribution is made. If left alone, this made the FLP an ineffective tool for income-producing assets.
However, asset protection attorneys discovered that if set-up properly, the only person who could make a distribution would be the general partner. Since the general partner is more than likely also the defendant in the case, he or she would never distribute the funds in a way that would allow it to be handed over to the plaintiff.
The key to success here is having the entity set-up properly. Many attorneys in the U.S. use a very old FLP that was designed for estate planning, not asset protection. It distributes assets on a pro-rata basis. This actually allows a judge to order a distribution. The judge can also order the defendant’s share of the FLP to be given to the plaintiff until the judgment is satisfied. However, if set-up properly on a non-pro-rata basis, giving sole distribution rights to the general partner, the Charging Order can actually make it so the plaintiff will never get a dime. What’s more, the general partner can take out interest-free loans or take a salary for management of the FLP, neither of which would be considered distributions, and would not be subject to the lawsuit.
In 1977, the IRS made the picture much more difficult for trial attorneys with ruling # 77-137. It states that the plaintiff will have to pay any taxes on judgments pursued through the CO, even if they never receive a distribution. This stopped most attorneys from even thinking about pursuing a lawsuit against a properly drafted FLP.
If set-up properly, you can protect both income and non-income producing assets by placing them in FLP’s. This will leave no assets available for a plaintiff to take. Furthermore, if a party should pursue a lawsuit against you anyway, they will not only not get any assets or income, they will also have to pay taxes on the judgment despite the fact that they will never get any of the money.
If you would like more information on these and other legal entity strategies, contact Legally Mine, LLC at 800-375-2453 or firstname.lastname@example.org. We are also available for presentations at your local and state association meetings.