FLP Charging Order Protection
Charging order – the family limited partnership:Family limited partnerships are used to make assets unattractive to creditors. The asset becomes unattractive to a creditor because, by placing the protected asset into the limited partnership the judgment creditor’s remedy changes.
The judgment creditor cannot execute directly upon the protected asset and force its sale. Instead, the remedy is outlined by the Uniform Limited Partnership Act which provides that “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.” This act also provides that “An assignment entitles the assignee to receive…only the distribution to which the assignor would be entitled.”
The drafters of the Uniform Limited Partnership Act inserted this charging order concept into the act to prevent the creditors of a partner from disrupting the partnership business. However, these same provisions can be utilized in the family limited partnership context to prevent the distribution of funds to the judgment creditor. This is because under relevant partnership law the general partner, who is likely to be a family member or a corporation controlled by family members, can prevent distributions.
The Internal Revenue Service has also held in Revenue Ruling 77-137 that the creditor with a charging order is treated as a substituted limited partner for tax purposes. As a result the judgment creditor is saddled with the tax consequences resulting from ownership without the capacity to force dissolution of the partnership or distributions from the partnership.
Family Limited Partnerships