Does Jurisdiction Matter?
There is no doubt that jurisdiction matters a great deal. This is particularly true for common estate and asset protection planning tools such as Limited Partnerships and Limited Liability Companies. The reason jurisdiction matters so much is because it is the very statues and case law of the chosen jurisdiction which you will be relying on when it comes time to use your planning. There are quite a few important little details when it comes to interpreting your Limited Partnership or LLC, but there is none more important than how the statute or case law interpret the “Charging Order”.
As we have discussed in other articles (See Does the FLP Really Work for Asset Protection?), a charging order is effectively an IOU from the LP or LLC to the person holding the order (usually a creditor). And how effective your plan is in limiting the creditors access via the Charging Order is absolutely dependent on the Statutes and Case Law of the jurisdiction you are in.
Statute vs. Case Law
This is another very important distinction. A Statute is enacted by the legislature and MUST be followed by the courts (at least that’s the theory). Case Law is a record of the previous court decisions and interpretations and is not necessarily binding on a subsequent court. This becomes important when a court decides a case for a certain result and then twists the law to fit the result. And it is much easier to “interpret” case law than a statute. Just ask Mr. Olmstead after the Florida Courts penetrated the established case law and crashed right through his LLCs.
So that means:
Rule#1: Only Use a Jurisdiction which has the Charging Order as the EXCLUSIVE remedy.
Rule#2: Make sure that this is said in the State Statute (i.e Arizona), Not the Case law (i.e. Florida)!
Rule#3: Have an Exit to any domestic structure if you are serious about Asset Protection. What that means is that even in the very best jurisdiction, be ready to exit if the courts determine that they want to bust into your planning.
As I have said before, when it comes to Asset Protection, it pays to have a global plan before you start putting your planning together. It’s all related, and every decision count!