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Before the FLP, your assets would be scooped up by a judgment.
After the FLP, your creditors have to take their judgment and convert
it into a charging order. The creditor cannot execute on the FLP
assets and force the sale of these assets. Instead, the creditor
is entitled to receive only the distribution that you would be entitled.
In short, the creditor only gets what the general partner decides
to distribute, which is nothing. What is even worse news for the
creditor is that IRS Revenue Ruling 77-137 treats the creditor with
a charging order as a substituted limited partner, imputing ownership
tax consequences to him even though he never receives any distributions
from the partnership. Thus, creditors who find debtor assets transferred
to a FLP often go away.
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