October 1999 Bulletin

Shield assets from lawsuits

Family Limited Partnerships have protection, benefit children

By Joel M. Blau

As a physician, you may feel that you're a prime target for any and all types of liability issues and the enormous lawsuits that ensue. You may be sued simply because an "injured" party assumes that by virtue of your profession you have "deep pockets" with plenty of money to pay exorbitant settlements. While not true in most cases, this general perception still prevails among the non-medical public. There are strategies, however, that can protect your hard-earned assets from potential liability exposure.

Recently, there has been considerable discussion regarding the use of Family Limited Partnerships as an asset protection vehicle. Typically, parents will fund the partnership by transferring certain assets, such as real estate, (including medical office buildings) a business entity, stocks or other assets for the benefit of their children or other family members. Within the partnership structure, the parents may act as the general partners, while children and/or grandchildren are the limited partners. General partners own a very small percentage, such as 5 percent, while the majority interest is owned by the limited partners. The general partners maintain control and have complete responsibility for partnership activities. Limited partners (the children) have no control or management rights. Liability is limited to the amount of their contribution to the partnership.

Benefits are derived from an income tax standpoint, estate tax reductions, as well as potential protection of assets. Income generated by a limited partnership is allocated according to ownership. Since the children own the majority interest, the income will flow to them at potentially lower rates. From an estate tax perspective, the amounts gifted to the partnership allow for reduction in the value of the parents' estate. In the event of lawsuits, most state limited partnership statutes prevent the creditors of a limited partner from attaching partnership assets.

The benefits of this strategy depend on the amount and types of assets you own. Additionally, legal counsel must be obtained. The documentation for the partnership must be carefully designed to avoid problems with both federal law and the law of the state under which the limited partnership is being created.

The manner in which you title property and other assets is also important from an asset protection standpoint. Individual ownership or use of a living revocable trust does not protect your assets from creditor. Assets titled as joint tenants with rights of survivorship also provide no protection. If either of the joint tenants is sued, the entire value of the asset is included for purposes of determining a settlement. If one spouse has greater exposure than the other, assets may be titled to the lower risk spouse. When both have potential liability exposure, other titling options should be explored. Many states permit a husband and wife to own their home and other real estate as "joint tenants by the entirety." This type of ownership protects the property regardless of which spouse is party to the lawsuit, but it can only be used for real estate assets.

Retirement plans also can provide you with a level of protection. Assets held in qualified pension and profit sharing plans, and in many cases IRAs, are exempt from most creditorsí claims. In addition, cash values of life insurance also are protected. Retirement and life insurance protection is mandated by the specific laws of each state.

Joel M. Blau is president of MEDIQUS Asset Advisors, Inc.

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