Part Two

Non-business assets or activities – Despite using the term “Family” in Family Limited Partnership, these are nevertheless still limited partnerships which are fundamentally business entities and are not meant for personal use. Therefore, the family residence should not be placed into a Family Limited Partnership, nor should normal family expenses such as utilities, clothing, educational expenses, etc. be paid from the FLP. Using a Family Limited Partnership for personal reasons could result in the entity being disregarded for tax and asset protection purposes.

Having a parent as the General Partner – The most common mistake in structuring a Family Limited Partnership, (from an asset protection viewpoint) is making the parent the General Partner (GP) of the Family Limited Partnership. The reason for this is that charging order protection relies on the GP not making distributions to a limited partner’s interest for the benefit of a creditor. However, if the parent winds up getting sued, the creditor could persuade the court to enter an order which would compel the parent to make a distribution to the parent’s LP interest, thereby subverting the charging order protection.

Having a parent as both General Partner and only Limited Partner – If the parent is both General Partner and the only Limited Partner (LP), then a court may find that since the parent owns all the interests, there is in fact no partnership and the parent only owns the Family Limited Partnership’s assets which thereby negates the charging order protection and any tax benefits. Although making the Parent both the GP and LP seems rather silly, there are promoters selling cookie-cutter structures that actually make this mistake.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.