Properly structuring a Family Limited Partnership (FLP)

Within their limitations, Family Limited Partnerships (FLPs) should play a role in a family’s estate and asset protection planning. Here are a few simple rules about correctly using FLPs:

Control at the General Partnership level – Usually whether an FLP works or not when challenged by creditors is determined by whether the General Partnership (GP) is able to avoid collateral attacks by creditors. At the same time, if the GP is not structured correctly, then control of the FLP can be lost. Therefore, it is extremely important that the GP be structured correctly.

Don’t overuse — The Family Limited Partnership is one of many asset protection techniques available and it should not be overused or made into a single large target. Consequently, the percentage of the client’s total assets going into an FLP structure should ideally either be less than 25% and not more than 40% except in unusual circumstances. Try to steer clear of promoters trying to place everything into the FLP.

Diversify – It is far better to have several smaller Family Limited Partnerships than having one oversized one. A good rule to follow is to have a new Family Limited Partnership created for every $2 to $5 million in assets. This keeps each FLP profile lower for both creditors and for any IRS audits.

Within their limitations, Family Limited Partnerships (FLPs) should play a role in a family’s estate and asset protection planning. Here are few simple rules about correctly using FLPs

Treat the Family Limited Partnership as a business entity not a family trust – The Family Limited Partnership must be treated as a business entity only, and should never be used as a family trust. All investment holdings of the FLP should be for business or investment purposes, and payments made by the FLP should assist those purposes. Never use an FLP used for personal family reasons such as mortgage payments or for funding college. If money is required from the FLP, then it should be borrowed from the FLP at current interest rates or distributed to the various trusts holding the interests, and from there given to family members.

Have a good operating agreement and good law – A key to a successful Family Limited Partnership is having a good operating agreement custom-tailored to the family business. It is also important that the FLP is formed in a jurisdiction limiting the creditor’s remedy to a charging order, and does not allow easy liquidation of partnership interests to satisfy creditors.

Have the trusts own your children’s Limited Partnership interests – With a little more work, the Family Limited Partnership can provide a great deal more asset protection if the Limited Partnership interests are conveyed to spendthrift trusts formed for the children.

Within their limitations, Family Limited Partnerships (FLPs) should play a role in a family’s estate and asset protection planning. Here are a few simple rules about correctly using FLPs:

Avoid moving offshore – In order to generate higher fees, there are some promoters who encourage Limited Partnership interests are transferred to offshore trusts. These promoters will l not tell you that for this arrangement to work you will probably have to leave the country in order to avoid being taken to jail for contempt of court. They will also not bother to tell you that case law establishes no advantage to have the Limited Partnership interests in foreign asset protection trusts as opposed to arranging well-thought-out, structured and drafted domestic trusts.

Avoid buying kits and asset protection promoters – If you have enough in assets to justify having a Family Limited Partnership, then you should take the time to talk with a licensed tax attorney having experience in properly structuring these and assisting you with transfers to the FLP. Family Limited Partnership “kits” and these one-size-fits-all promoters invariably cause problems, which means that there will be additional costs to both fix past problems and finally do it right.

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Family Limited Partnerships

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