Family Limited Partnerships
The Family Limited Partnership (FLP) has been a primary asset protection tool for many years. Originally designed as a tax savings strategy to shift income to lower bracket family members, the FLP is now widely used to reduce estate taxes (where applicable) and protect accumulated wealth from potential claims.
It’s important that you know an FLP in and of itself is not the “be all end all” asset protection strategy. It does have it’s benefits however and we feel it’s important to detail it for you here.
An FLP is simply a limited partnership with special features designed to create tax savings and/or accomplish other asset protection goals. It is set up in such a way that you, or you and your spouse, are general partners in the business in question, each owning a small (1%-2%) interest. “Safe assets”—those not likely to produce liability—such as bank and brokerage accounts, as well as other passive investments (not real estate), are generally transferred into the FLP.
The FLP works well for asset protection because the laws in every state do not permit a creditor to seize or collect against property held by the partnership. The property transferred to the FLP is generally safe from attack, but the creditor may attempt to reach your ownership interests in the partnership.
Although an FLP on it’s own does offer substantial added protection to protect against collection activities, such as “charging orders” and foreclosure, the limited partnership interests in the FLP are usually protected by using a Trust in conjunction with the FLP.
FLP - Asset Protection Plans and Offshore Services
This tip-n-tactic contains part two of five about the Family Limited Partnership.
Remember that your trust should hold non-liability producing assets, normally bank accounts, and securities. (Sometimes you may put up a home, which requires the services of a local expert to transfer).
If you hold liability-producing assets in your own name, such as a business or an apartment house, these should be put into a FLP for protection. If you own stock in privately held businesses, this stock should be put directly into the trust.
The benefit of this structure is this; if there is a slip and fall at your apartment house and you are sued, the creditors can’t attack all of your assets. By putting the apartment house into the limited partnership, the judgment creditor cannot seize either the apartment house or the stock portfolio; instead, they must get a “charging order.” This means the judgment creditor can only attack the asset involved in the litigation… in this case that would be the apartment house.
So, a family limited partnership is a best used as a way of separating ownership from control. A family limited partnership has three parts:
The investment (example: the apartment house)
The limited partner (who has no say in what is distributed or done in regards to the investment)
The general partner (who has complete say in what is done).
Under the structure that TrustMakers creates for you, the Asset Protection Trust (APT) is the 99% limited partner and you (the settler) are the 1% general partner. Under this structure, you will settle your APT at the same time that you create the domestic FLP. You, the client, are initially the general and the limited partner.
The 1% general partner has full control over the FLP and its assets. The 99% limited partner has no control over the FLP or its assets, but has almost all of the ownership.
Because a partnership requires at least two different partners under state law, another person or entity can attain a temporary interest until the foreign APT becomes a limited partner. Of course, use of such a person or entity would not be necessary if your spouse were involved as a second partner in the planning.
Here’s how it works: You give the limited partner 99% interest (ownership) and 0% control with no liability. You give the general partner 100% control and 1% interest (ownership).
The limited partnership interest is held by your asset protection trust. If a creditor tries to attach a judgment to the family limited partnership, you (the general partner with all the control) get to decide how much, if anything, to distribute.
That’s all for this segment. We will continue with part three of our discussion of FLP’s in your next edition of Asset Protection TNT.
Family Limited Partnerships