Family Limited Partnership as an Asset Protection Tool

A Family Limited Partnership does so much more than simply provide protection from potential creditors. It can be structured for the benefit of running an efficient business, keeping it within a family, and it can minimize estate taxes. However, under the constraints of a header, my objective was to at least trigger the interest of you business owners. So without further delay, let us look at the anatomy of this legal instrument.

A Family Limited Partnership can be defined as a form of ownership that can be used to transfer land or other assets from one generation to the next. Pretty sexy definition right? 😉 But let us look at its use in real life. Let's say we are dealing with a business owner, whether that individual is a real estate investor, physician, or any other profession would not make a difference. That person would simply place his / her investment interest in the partnership. He / she would retain a 1% interest as a general partner, all the while transferring a 99% to the limited partner, which could be his Revocable Living Trust. As you can see, this format would enable the individual to retain control for management purposes. However, in the event a lawsuit and a judgment follows, a legal layer of protection would make this FLP very unappealing.

Why you ask? When assets are placed in an FLP, a creditor is severely restricted from reaching them, even once a judgment has been obtained. That limitation would be in the form of what is called a charging order. This can be seen as an assignment of income, in that it is an order from a court requesting future payments to be made to the creditor. However, that interest would be equivalent to that of a passive owner, and thus the general partner may not elect to make such distributions. Again, taking the thought process to its finality, why would that be burdensome to a creditor? Because a creditor would be taxed on that share of partnership income… Even if no distributions are made! As you can imagine, this gives ground for much settlement discussion.

An FLP can also be used for assets which need depreciation for estate tax purposes. So assuming we are dealing with a large asset that could possibly incur heavy estate taxes, one could in turn put that asset in the FLP giving the beneficiaries some interest. This would cause a business valuation a depreciated dollar value, as any third-party investor would not be as attracted in purchasing an asset with family restrictions and ties.

So these are some of the major points of an FLP. Now don't get me wrong, I do not consider the FLP to be amongst the strongest asset protection vehicle. However, it is one arsenal to keep in mind, especially when facing estate taxes on the horizon. Hope you enjoyed this informative blog, I'll see you next week!