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The partnership agreement could further state that limited partnership shall have right to buy out general partner for his share of partnership and appoint a new general partner to replace her (the "you" in this example is husband; we are making wife general partner because we assume that husband's risk of getting sued is higher; if opposite were true, then we would arrange partnership accordingly).
Let's say that you are sued and a creditor obtains a $50,000 judgment against your name. The creditor can attach your limited partnership interest but only to extent of your income as a limited partner (called a "charging order"). The creditor who attaches a limited partnership interest cannot participate in management of partnership, and thus cannot force general partner, your spouse, to distribute income. As general partner, your spouse stops paying limited partners' distributions, because in her discretion limited partnership would be better served to reinvest capital.
One year later, creditor still has a $50,000 unsatisfied judgment. Just to top it off, partnership sends creditor a form "K-1" for creditor's share of your "phantom" income (In our example, partnership assets are worth $300,000. At a 10% annual return, your share of income would be approximately $30,000 - creditor would have to pay income taxes in ballpark of $10,000! If creditor does not pay tax due on your undistributed share of income, IRS may come after creditor!). You will be in a strong position to force your creditor to settle his claim for a fraction of its value.
Let's say a creditor sues your spouse and tries to attack your spouse's general partnership interest. At that point, partnership exercises its power under partnership agreement to buy out her general partnership interest in amount of $2,000 or 2%. The partnership then finds a new general partner. With proper planning, this may not be considered a "fraudulent" conveyance because general partner received full compensation for her partnership share.
"Family" LLC's - To Good to be True?
Another similar tool for protecting your wealth is LLC or "Limited Liability Company." An LLC is like a cross between a corporation and a limited partnership. All of its partners (called "members") have limited liability and all of its members can participate in management of LLC without suffering any liability.
Any assets you hold in an LLC are protected from creditors in same way your assets are protecting in a limited partnership (i.e., creditor's remedy is limited to a "charging order"). In addition, since all members are shielded from liability, an LLC may be an excellent device for holding investment real estate - members are protected from tenant lawsuits and equity of members is protected from other creditors.
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