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Charging Order Protection.

By Rob Lambert - Email Editor

Date : September 18, 2008

Dear Valued Reader,

Last week I discussed the often-illusory "corporate veil" which corporations and LLC's are advertised as providing.

This week I will touch on the much touted Charging Order Protection which purveyors of Limited Liability Companies (LLC's) and Limited Partnerships (often called Family Limited Partnerships or FLP's) advertise as offering "iron clad" Asset Protection to protect your "family fortress" (Jeez, I hate the jargon the promoters use).

The argument goes that a creditor of either a member of an LLC or a partner of a FLP cannot force the entity to disgorge its funds to pay legitimate debts of the member or partner.  Instead, the promoters argue that a creditor is forced to wait until the managers of the LLC of FLP actually authorize and make a distribution to the member or partner with creditor problems.

In short, the creditor is forced to wait, possibly forever, to have his judgment satisfied by a distribution.

Until the manager of the entity (often the debtor) makes a distribution, the creditor is limited to a "Charging Order" and nothing more.

Further, many of the promoters incorrectly state that the creditor is forced to pay the taxes relating to the income tax due on the undistributed funds supposedly waiting to satisfy the Charging Order even though the funds arenot distributed.

Well, I am sad to say that relying on charging order protection alone is poor Asset Protection Planning at best.  WHY?  Isn't Charging Order Protection in the statute?  YES…, BUT….

Charging Order protection has been abused by every slimy businessman looking to disenfranchise his soon to be ex-wife or business partner.  Too many doctors have fallen for the promoter’s line of poor Asset Protection advice and, preparing to starting his new life with his twenty something scrub nurse, put his assets into some LLC or FLP thinking that his soon to be ex-wife just can't get to them.  Well, nothing could be further from the truth.  Bad facts force judges to create new law to do the right thing.

The abuses of charging order protection have caused judges to start making exceptions to the plain statutory language.

I simply advise clients to never rely on charging order protection.  It is helpful, particularly with domestic assets which cannot be moved out of harm’s way, but not reliable.

Note, if you ever are forced to rely on charging order protection please make sure that the entity is "Old and Cold," has multiple unrelated members and was set up for a valid business purpose (more on all of this later).

For now, please just recognize that charging order is not reliable.  If you pay some guru a fee to set up a stand alone LLC or FLP as an Asset Protection vehicle, I believe you are paying good money for hobbled technology.  Make sure you get an unqualified opinion in writing from them, forcing them to put their money where their mouth is.

A stand alone LLC or FLP is never 100% reliable as an Asset Protection vehicle.

Charging Order Protection is slowly going the way of the Doo Doo Bird.

Next week I will be discussing some of the good things which these wonderful entities do provide.  Just remember that solid Asset Protection is not one of the benefits.

Have a healthy and protected week.

Rob Lambert

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