Part Three

Can a Family Limited Partnership protect family members from creditors (including ex-spouses?)

Should you or another family member become unable to satisfy a future creditor, that future creditor’s only remedy against the partnership is the right to receive a “charging order” against that member’s interest in the partnership? Assuming there is no fraudulent conveyance, the creditor may not be able to reach partnership assets. While the charging order allows the creditor to reach income, the assets are safe.

In addition, the Family Limited Partnership can be planned to provide that an involuntary transfer to a creditor is not permissible and that the transferred interest is to be purchased by the partnership at its fair market value (frequently much less than the underlying asset value). An ex-spouse or a divorcing spouse receives the same treatment provided that the partnership interest is the separate property of the family member.

The restrictions on transfer also could deter an irresponsible family member from wasting family assets.

Does a Family Limited Partnership provide the flexibility I desire in estate planning and business operations?

In comparison with an irrevocable trust, which may not be amended, a Family Limited Partnership is a flexible document. If all the partners in the partnership agreement concur (typically, all are family members) the partnership agreement may be amended or terminated. Also the partnership may be ended without adverse income tax consequences.

What are the disadvantages of Family Limited Partnerships?

The major disadvantage of a Family Limited Partnership is the ongoing cost. After the initial start up cost, there are annual franchise taxes and tax returns such as those for corporations. And, there is the obvious: reducing in value for estate tax purposes is due to the very real affect of the lack of control and length of marketability discounts. This is not a trick being done with re-characterization of your property. At the same time, these aspects are what give the family limited partnership its significant chance of success in accomplishing your estate planning goals.

While Family Limited Partnerships are being implemented by estate planners throughout the U.S., it must be remembered that they are a comparatively new tool, dependent on several recent developments in the law. There is no assurance that the law will not be changed in the future or that Family Limited Partnerships will not in the future come under serious attack by the IRS. However, based on the current state of the law these tecniques have a significant possibility of achieving all or part of their goals and that the potential savings exceed the costs.

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.