Many asset protection plans feature one or more partnerships.
The family limited partnership (“FLP”) has evolved into the foundation of the asset protection plan because of its multi-faceted ability to insulate assets from outside interference, transfer assets to family members, de-value assets for estate tax purposes, and allow the original owner to retain control of assets all at the same time.
An FLP is a specially designed limited partnership, consisting of one or more general partners and one or more limited partners. The general partners are responsible for managing partnership affairs while the limited partners have no management rights. In the typical scenario, selected family assets are transferred the FLP and the husband and wife are named as limited partners. The plan is to make the children limited partners over time. Special care must be taken in naming an appropriate person as the general partner.
The FLP is used for asset protection because it allows an individual to maintain full control and enjoyment of his property while divesting himself or herself of legal ownership. The law provides that a creditor of a partner cannot reach the assets of the partnership to satisfy an obligation of the partner because it is the partnership as an entity, not the partner, that now owns the asset. Instead, the creditor receives a charging order that in essence causes the creditor to be taxed for income never received, which would discourage potential lawsuits.
One more important feature of the FLP is the discounting of its assets. Because the assets are held in limited partnership units, the assets become fractionalized and less marketable allowing as much as 40% discounts to be applied to the value of the unit shares of the assets. These discounts result in substantial devaluation for estate tax purposes.
There are numerous factors to consider and formalities to comply with when forming and operating an FLP. Thus, carefully a drafted partnership agreement and minutes are critical to ensure the objectives for forming the FLP are met.
Contact Collins Law to discuss your entity formation options and begin protecting your personal assets today.