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What is a Family Limited Partnership?
 A
family limited partnership is a limited partnership formed under
the requisite state law, which limits who can actually be a
member of the partnership. Family limited partnerships (FLPs)
typically limit the limited partners to “family members.” Family
as defined by the IRS includes descendants (children and
grandchildren), siblings, ancestors and their spouses.
Currently, family limited partnerships play a critical role in
estate planning and asset protection for the high net worth
client. Their effectiveness in transferring assets to other
family members by combining several techniques including
“discounting” of the limited partnership interests and thereby
maximizing gifting and estate tax planning are unparalleled with
other planning techniques. They are also used to protect family
assets of a client who has a high risk of liability when the
client wants to avoid an “irrevocable” transfer and maintain
maximum flexibility in managing the assets.
It works like this:
Usually one of more family members transfer property to the
FLP in exchange for limited partnership interests or units. The
limited partners are passive investors with no management rights
and limited liability. Each partnership must have a general
partner who usually owns up to an 1% interest in the partnership
but who has all of the control and all of the liability. For
this reason most general partners are themselves entities such
as a trust or a limited liability company (LLCs). The idea is to
transfer limited partnership shares to other, usually younger,
family members. Because the limited partnership shares are not
attractive to an arm’s length purchaser there is an opportunity
to take a “lack of marketability” discount.
The dreaded lawsuit
More than fifteen million lawsuits are filed every year.
Anyone who has large savings or stock portfolio is an attractive
target for lawsuits. Attorneys, physicians, chiropractors,
dentists, architects, CPAs, engineers, real-estate brokers,
contractors and all other professionals are concerned with
litigation from malpractice claims and business disputes. Anyone
who has accumulated a non-retirement savings account could lose
this by lawsuits from auto accidents, an accident caused by your
school age children or catastrophic health expenses. Business
owners face threats of possible lawsuits from employees,
customers, lenders, competitors, business partners and
government agencies. Landlord owners are threatened by potential
lawsuits from tenants, visitors to the tenants, lenders and
buyers. A lawsuit from any one of these sources, win or lose,
can easily ruin a family’s financial future.
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What assets can you protect?
Many clients who own large ranches, have large non-retirement
stock portfolios, real estate investments and other assets will
transfer them into a FLP to also insulate them from potential
creditor claims as well as for the estate planning benefits. A
creditor cannot succeed to your ownership of limited partnership
shares, instead the creditor is usually only able to get a
“charging order” which allows the creditor to claim any
distributions made from the partnership. But whether or not the
creditor actually receives the distribution – they WILL be
liable for the tax on the “phantom” distribution. Very few
creditors want income tax liability on income they do not
receive. This makes your partnership shares far less attractive
to a creditor seeking satisfaction.
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