Asset Protection: General/Limited Partnership, Corp Chapter C, Chapter S, LLC, Trusts

Limited Partnership, Corporation Chapter "C" Chapter "S" Corp, Family Limited Partnership, Trusts

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Asset protection comparison & definitions of General Partnership, Limited Partnership, Corporation Chapter “C”, Corporation Chapter “S”, Limited Liability Companies & Revocable Trusts and Irrevocable Trusts.


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THE CONCEPT OF ASSET PROTECTION includes the possibility of placing title in certain assets in the name of a less vulnerable spouse or other family members, or a legal entity. One should be very attentive in transferring title without an open invitation to a “fraudulent transfer” claim against the asset transferred as a result of the possibility of death by the spouse or a family member, or the possibility of a dissolute marriage, or even a court judgment.
Fraudulent conveyance has to do with transferring assets at less than the “fair cash value” thereby defrauding a potential creditor or the intentional divesting of assets which become unavailable for satisfaction of a lawsuit. Fair cash value means cash or near cash value at the time of transfer, not the price you paid for the asset. Example: you transfer your portion of your equity in your home to your wife for $100.00 and the fair cash value of your portion of the equity was $250,000 or you transfer title to your car to your brother for $10.00.

The most common methods of holding assets by INDIVIDUALS:
  • Joint Tenancy
  • Joint Tenancy with right of survivorship
  • Tenants in Common
  • Tenancy by the Entirety
  • Community Property
(Read part 1 “Asset protection with Joint Tenancy, Tenancy in Common, Tenancy in Entirety & Community Property”)
LEGAL ENTITIES (Artificial person created by application of law):
  • General Partnership
  • Limited Partnership
  • Limited Liability Company
  • Corporation under Chapter “C”
  • Corporation under Sub Chapter “S”
  • Revocable Trust (There are many Revocable Trust variations, since a Trust is nothing more than a Contract)
  • Irrevocable Trust (There are many Irrevocable Trust variations, since a Trust is nothing more than a Contract)


A General Partnership is an association of individuals, collectively owning property or a business relationship of a collective group of individuals acting as a business unit/enterprise as a going business concern.
The worst way to hold any asset or to do business as a partner is a General Partnership. In my opinion, there’s absolutely NO advantage, whatsoever. It’s all negative. Each member of the General Partnership is liable for all potential liabilities of each of the other partners. In other words, an employee of the General Partnership causes an accident while on company business. Each of the Partners individually can be held 100% liable. The deeper pocket theory is he who has the most to lose will lose the most. NEVER do business in General Partnership or become a partner of a General Partnership.


Limited Partnership is one or more General Partners and one or more Limited Partners. The General Partner(s) controls all actions of the partnership. The Limited Partners are the silent partners; the Limited Partners have no control. In certain cases the Limited Partnership has significant asset protection and tax advantages.
For example, in a Family Limited Partnership the Parents take the responsibility of day-to-day management as a 2% General Partnership (each Parent 1%) and retain 98% as Limited Partners. In each of the subsequent years, each of the General Partners (the Parents) gift each of their children an excluded gift tax amount of $12,000 (for the taxable year beginning 2006 and thereafter). Over time, the children will have a 98% interest in the Family Limited Partnership. However, the control of the Partnership remains in the hands of the General Partners (i.e. the Parents). This is a noteworthy tax-efficient way to transfer wealth from the Parents to their children tax-free.
Another tax advantage for Estate Taxes is the valuation of a minority interest as a Limited Partner due to lack of control or ability to sell a minority interest. A Limited Partner is a “Silent Partner” in the management and control and therefore, the Limited Partnership Interest has a discounted value, generally up to 40% as a minority interest, depending on the nature of the assets. Additionally, the Limited Partnership interest has a discounted marketability, up to 40%. Combined, minority interest and lack of marketability, for estate tax purposes it can be argued that the fair cash value of asset is diminished by as much as 80%. Aggressive? The IRS considers this type of discounting abusive.
For asset protection purposes, the Family Limited Partnership, for decades, has been considered the Cadillac of Unites States asset protection systems. By definition a Partnership is considered to be two or more persons.


The more commonly recognized advantages for the Family Limited Partnership are:
  1. Family Limited Partnership Asset protection. The creditor may not step into the shoes of the “Partner.” The only remedy for the creditor is the “charging order” obtained subsequent to litigation and judgment in favor of the creditor. A creditor who obtains a charging order is therefore liable for Federal Income Taxes on their pro-rata share of the partnership income even though the creditor may never be able to receive or collect the income. A major detriment to the creditor.
  2. Family Limited Partnership on Reduction of Federal Estate Taxes. You can make a lifetime of gifts under the gift tax rules ($12,000 for 2006 and forward) and still retain all the control.
  3. A reduction in taxable estate tax valuation by application of discounting for lack of marketability and minority interest.
The negative of Limited Partnerships is the “General” Partnership interest. If the General Partner loses a frivolous lawsuit to a creditor, the creditor controls the Partnership. The other negative is that Partnership interests go to Probate and are includible assets for the Estate Tax. This problem can be avoided if the “General Partnership” interest is owned by an Irrevocable Trust.


The LLC is a hybrid “pass-through” legal entity similar to a Partnership but with the limited liability of a Corporation.
For “Income Tax purposes” income and expenses of the LLC “pass-through” directly to form 1040 income tax return proportionate to the percentage (%) of ownership, or if there is more than one member, to a percentage (%) unrelated to the ownership percentage (%), i.e. 50/50 or 75/25 etc. irrespective of the equity ownership %. This is a significant advantage over other forms of entities and it’s the only entity that allows this departure.
The LLC also has another significant advantage; members decide how they want to be taxed, i.e. sole proprietor, partnership, or corporation. The LLC will obtain it’s own Federal Identification Number (similar to a social security number) to operate as a business, and maintain it’s own bank account.
For “Asset Protection purposes” the LLC is creditor proof. Creditors cannot step into the shoes of the LLC. The sole remedy of the creditor is a “charging order” against the members, unenforceable against the LLC, similar to the Partnership, described above.
The legal characteristic most interesting to the business world is undoubtedly the limited liability status of LLC owners. With the exception of corporate entities, the LLC is the only form of legal entity that lets all of its owners off the hook for business debts and other legal liabilities, such as court judgments and legal settlements obtained against the business. Another way of saying this is that an investor in an LLC normally has at risk only his or her share of capital paid into the business. To learn more about the advantages of an LLC, please email us at [email-obfuscate email=”” link_title=”Email Rocco Beatrice” class=”email_obfuscate_class” tag_title=”Question from UltraTrust.com”] or call us toll-free 888-93ULTRA (888-938-5872) for our executive summary.

CORPORATIONS (Standard Corporation under Chapter “C”)

The corporation is a legal entity created under the different state laws and internationally recognized as the most common way of doing business or holding business assets. A standard corporation is also referred to as a “C” Corporation formed under state laws. Shareholders enjoy a limited liability on business assets and cannot be held responsible for corporate debts. However, clever lawyers and their persistent clients, with the help of the courts, have figured out how to pierce the corporate veil of limited liability and have been able to hold responsible corporate shareholders, corporate officers, and employees personally liable for negligence reaching far outside the corporate structure.
Shareholders of “C” standard corporations may feel the double pinching of taxation. The corporation is primarily liable for taxes on corporate profits then shareholders are also taxed on the distributions from the same profits, except for common shared controlled corporations.
The Limited Liability Company has essentially replaced the “C” corporation by electing to be taxed as a corporation, but with stronger asset protection as an LLC.
Corporations similar to the LLC have the following advantages:
  1. Shareholders are not personally responsible for LLC debts.
  2. Unlimited number of membership units (similar to Corporation stock-holders).
  3. Ease of transfer of LLC membership interest. Have you noticed that some publicly traded shares are LLC membership units?
  4. Ease of raising capital by issuing additional membership units.


A Subchapter “S” Corporation is a corporation formed under state law, which files a special IRS tax election to have corporate profits pass through the business and be taxed only at the shareholder level (similar to the tax treatment of LLCs), but less flexible because of IRS limitations specifically on the sub “S.”
Like LLCs, Subchapter “S” Corporations also provide limited liability protection to all owners, however a number of litigation cases demonstrate a substantial erosion of this concept. The “S” corporation tax election comes at a fairly heavy price: “S” corporations must limit the number and types of shareholders. They are restricted as to how they allocate profits and losses among owners, the types of losses they can pass along to owners to ease their income tax burden, and the kinds of stock they can issue to investors.
All business entities require a certain amount of attention but Subchapter “S” Corporations requires more formalities. Subchapter “S” Corporations typically need regular and special meetings of directors and shareholders recordings needed to transact important corporate business or decide key legal or tax formalities. And although profits and losses of an “S” corporation are passed along to its shareholders similar to the LLC, the “S” tax return is much more cumbersome.
The primary difference between Subchapter “S” Corporations and LLCs has to do with the requirements for electing Subchapter “S” Corporation tax treatment and some of the unique tax effects that result from this election. “S” corporations are very, very rigid and inflexible with substantial operating limitations. To be eligible to make an “S” corporation tax election with the IRS, the corporation and its shareholders must meet a number of special requirements. Here are a few of the “S” corporation tax requirements that can present a problem:
  1. Individual shareholders of a Subchapter “S” corporation must be U.S. citizens or have U.S. residency status. If shares are sold, passed to (by will, divorce or other means), or otherwise fall into the hands of a foreign national, the corporation loses its “S” corporation tax status.
  2. Shareholders must be individuals or certain types of qualified trusts or estates. “S” corporations can’t have partnerships or other corporations as shareholders.
    Under typical state statutes, LLCs may have both natural (individual) and artificial (corporate, partnership, trust and estate) members. Moreover, the LLC may be the general partner of a partnership or be owner of the “S” stock.
  3. There can be no more than 75 shareholders in an S corporation, unlike an LLC which may have an unlimited number of shareholders.
  4. “S” corporations must have only one class of stock. Different voting rights are permitted, meaning that “S” corporations may have different classes of shares, but it’s just too inflexible.
IT’S SAFE TO SAY THAT THE “S” CORPORATION HAS BECOME A WHITE ELEPHANT. The “S” status tax benefits are quickly dissipated due to its very rigid and inflexible operating requirements. Taxpayers electing the “S” status find out the hard way that they spend an inordinate amount of time and ingenuity in trying to make the “S” emulate the “C” corporation or the LLC. These unwanted results could be avoided with the LLC.


A Trust is nothing more than a Contract between the “Grantor” or the original owner, the “Trustee” who will hold and manage the assets for the benefit of “Beneficiaries” which may include the original owner, his spouse, children, grandchildren, or anyone the Grantor(s) wishes.
The word “Revocable” means that the Grantor(s) left too many strings attached to the contract to “revoke” the contract. For purposes of income taxes, the Grantor of a Revocable Trust or a Revocable Living Trust is the deemed owner of the underlying assets and is primarily responsible for the taxes imposed on the Revocable Trust. Because of the Grantor’s ability to “revoke” the Trust Agreement, there’s absolutely NO asset protection of any kind. In addition, assets of a Revocable Trust will avoid the Probate process but it will NOT avoid the Estate Tax. Only an Irrevocable Trust will avoid the Estate Tax.


The opposite of revocable is “irrevocable.” In other words, no strings are attached by the Grantor. Once assets are transferred from the Grantor(s) to the Trust, there’s no more control. It’s this precise lack of control that makes this Trust very powerful asset protection device. You can’t be sued for assets you no longer own or control.
The fiduciary duty of an independent trustee of an irrevocable trust is onerous. The Trustee may never deal himself a new hand and must preserve the assets entrusted to him at any cost. Courts take a very unpleasant view on the Trustee who has abused his fiduciary duty. Breach of fiduciary duties by a Trustee could be considered and intentional tort subject to punitive damages.
Trustees fiduciary duties include:
  1. Duty to keep all beneficiaries informed on a reasonable basis by communicating the material facts of any material transactions of Trust assets.
  2. Duty to administer Trust assets solely for the benefit of beneficiaries.
  3. Duty to preserve Trust assets.
  4. Duty to invest all Trust assets in a prudent diversification.
An example of breach of fiduciary duty:
An appellate court recently affirmed a $1,000,000 judgment against U.S. Bank National Association (the Trustee) for failure to adequately diversify a portfolio. In an opinion released September 1, 2006, an Ohio Court of Appeals affirmed the lower court finding that U.S. Bank breached its fiduciary duty to diversify by not diversifying quickly enough.
The Grantor had established a $2,000,000 charitable remainder Unitrust funded with Procter and Gamble stock. The investment officer began to reduce the concentration in P&G stock by selling shares of the stock each month. He postponed sales when the price of the stock dropped and resumed diversification when prices began to go up.
By the end of the year, the value of the trust had dropped in half. The successor Trustee brought an action for breach of fiduciary duty and a jury returned an award of $1,040,222.
Source: Fifth Third Bank v. Firstar Bank, N.A. n.k.a. U.S. Bank National Association (2006-Ohio-4506).
To learn more about how to hold title to your assets based on your financial goals for each of your assets, avoid the Probate process, and how to eliminate the Estate Tax through the use of Irrevocable Trusts, LLC’s, and precise domestic and offshore asset protection systems by competent visit www.ultraTrust.com.
Our operating strategy is to leverage our collective knowledge and resources with multi-dimensional strategies designed to protect your assets from potential frivolous lawsuits, preserve your wealth by recapturing lost tax dollars, defer capital gains taxes, reduce taxes on your income streams, eliminate probate and estate taxes. Finally, tax efficient wealth transfers to the continuation of your next generation.

Category: Asset Protection, Trusts

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