family partnership

The use of FAMILY LIMITED PARTNERSHIPS (FLPs) and family limited liability companies (LLCs) in estate planning has greatly increased in recent years. Both allow for the transfer of wealth from one generation to the next with significant transfer tax savings and they also provide for many non-tax benefits. As the name implies an FLP is a partnership between family members and is created under the laws of the particular state. The senior family member usually retains the general partnership interest and limited partnership interests are transferred to lower generations. Since the limited partnership interests have restrictions on voting, pledging and transferability, their value is discounted compared to the value of the underlying assets actually transferred to the partnership. Hence, limited partnership units may be transferred to lower generations at a discounted value. The senior family member's taxable estate is not only reduced but it is also a leveraged reduction. Since the senior family member retains the general partnership interest, the senior family member continues to control the management of the underlying assets as well as the distributions to his or her family members.

While estate tax reduction has been a primary motive for FLP formation, such entities have numerous other advantages not the least of which is asset protection. Personal creditors of the owners of FLP interests cannot reach the assets inside the FLP. Instead a creditor may only obtain a "charging order." This allows the creditor only the rights of an assignee of the debtor's partnership interest. The reason for this is to prevent the disruption of the business and adversely affecting the other partners. A creditor with a charging order would only be allowed to receive distributions made to the debtor partner charged. Note that such a creditor may not force distributions from the partnership. Therefore, a creditor might be saddled with phantom income when no distributions are in fact actually made. Not a good result for the creditor. A free standing FLP is an excellent entity for asset protection with a long history of validation in the courts.

FLPs are also coupled with other asset-protection entities such as asset protection trusts. For example, an FLP formed domestically with some or most of the partnership units owned in the name of the offshore trust will present quite a formidable obstacle for even the most zealous creditor. Good asset protection strategies do not rely on stealth. They do not need to rely on stealth. Good asset protection strategies rely on having a particular set of assets controlled by a particular validated body of law which favors the debtor.

LIMITED LIABILITY COMPANIES (LLCs) are now statutorily recognized in all 50 states and provide advantages and benefits similar to FLPs. LLCs may be taxed as a partnership using the check the box regulations and they are easy to set up and operate. On the other hand, FLPs have a long-standing validation in case law as an asset protection entity and therefore are favored by many asset protection planners.

LLCs are very valuable as free-standing entities for assets giving rise to "inside" liability. In other words the liability might arise because of the asset itself. For example, assume the owner has a small trucking enterprise. An accident caused by one of the trucks gives rise to a judgment which presents potential upstream liability. The judgment creditor attaches not only the trucks, but also all other non-exempt assets owned by the owner to satisfy the judgment. Putting the trucking business inside the LLC prevents the creditor from reaching assets other than the LLC assets.

As with FLPs, LLCs may be coupled with other asset protection strategies to create increasing difficulties for a potential creditor.

Contact us to discuss establishing a Limited Liability Company or creating an LLC in conjunction with an asset protection trust structure.