Putting Personal Residences into an FLP or FLLC: A No-No By Jeffrey R. Matsen, Esq.
An entity or series of entities may not be created with no business purpose and personal assets transferred to them ... simply as a means of shielding them from creditors.
The question of whether or not a personal family residence should be placed into a Family Limited Partnership (“FLP”) or Family Limited Liability Company (“FLLC”) is a frequent topic for discussion. The impetus for such a decision is based on the theory that the FLP or FLLC affords the owner a degree of asset protection against personal liability because a creditor is allegedly limited to a Charging Order Remedy when trying to get at the assets inside the FLP or FLLC. A Charging Order limits the creditor to a distribution right rather than the ability to seize the assets themselves within the FLP or FLLC. Whether or not the Charging Order Remedy really effectively precludes a creditor from getting to the assets of the FLP or FLLC is a question which I have addressed in getting to assets that are inside an FLP or an FLLC than if they are held in the owner’s individual name. However, it wouldn’t appear that placing a personal residence into an FLP Liability Company is supposed to have legitimate business purposes and to be it would, therefore, appear that you would have to pay rent to the FLP or FLLC in order to make any business sense of the transaction. In fact, placing the residence into the FLP or FLLC could engender several adverse tax consequences, i.e., the loss of the capital gain credit on the sale and the state real property tax exemption. But, perhaps, the homeowner is willing to tolerate the adverse tax consequences in exchange for the purported asset protection
the lack of business purposes) that the FLP or FLLC is really a sham. For example, the following language the Turner case (In re Turner 335 B.R. 140 Bkrpt. N.D. CA. 2005)
About the Author Jeffrey R. Matsen is the founder of Matsen Voorhees Law. He has been designated by Worth Magazine as one of “America’s Top 100 Attorneys”, by Los Angeles Magazine as one of California’s “Super Lawyers” and by OC Metro Magazine as one of “O.C.’s Top Lawyers.” The Nationally Renowned Attorney Rating Service, ‘AVVO’ has rated Mr. Matsen a perfect “10/10 Superb”. He has continued to achieve the highest “AV rating” and has been designated a “Preeminent Lawyer” by the only other prestigious attorney rating directory, Martindale Hubble. He has been a Professor of Law at Western State University and Adjunct Professor of Law at Chapman University School of Law and an instructor at the Golden Gate Program of Advanced Taxation. He has written several course materials and delivered continuing education programs to other attorneys and advisors in the areas of estate and asset protection planning, limited liability companies, family limited partnerships and business formations. Matsen is an internationally recognized authority in these areas.
very pointedly highlights the problem: “Asset protection is not illegal and is honored by the law if done for a legitimate purpose. For example, an individual may do business through a corporation or limited liability company and will not be held personally liable for the debts of the entity. The assets of the corporation or a limited liability company will not be considered the assets of the individual interest holder. However, an entity or series of entities may not be created with no business purpose and personal assets transferred to them with no relationship to any business purposes, simply as a means of shielding them from creditors. Under such circumstances, the law views the entity as the alter ego of the individual debtor and will disregard it to prevent injustice.” No” in most instances. Are there other Asset Protection Planning techniques should be considered. Obtaining a second trust deed line of credit is an excellent planning step. Transferring the residence to a Domestic Asset Protection Trust
be effective. In any event, any strategy should be thoroughly discussed and analyzed by competent legal counsel.
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Readers of this document should consult with independent advisors regarding the tax, accounting and legal implications of the proposed strategies before any strategy is implemented. Nothing in this presentation is intended to offer securities or investment advice. Tax and regulatory rules affecting strategies in this document may change often and have varying interpretations. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing or recommending to another party any matters addressed herein.