The Family Limited Partnership can provide a strong layer of defense between your assets and your creditors. Once you’ve established an FLP, creditors pursuing business assets are tough. If a creditor receives a judgment, there is a specific court judgment that must take place to try to receive profit distributions from the partnership. Even if the creditor receives a collection order, that does not guarantee that the creditor will receive any amount of the debt, but rather puts the creditor in a position to become a recipient of income, whether or not the earnings are recognized. The money is not distributed to the creditor, but the creditor must pay taxes on the income earned.
FLP is one of the most effective tools for asset protection. It helps reduce wealth and income taxes, provides the ability to manage assets, while denying creditors access to the asset.
General partners have the majority of control, while limited partners have little or no control. The law rejects the rights of creditors to obtain interests in the company. FLPs insulate your assets from lawsuits and help you maintain control over your assets. FLPs are used to protect real estate, stocks and bonds, cash, jewelry, furniture and accessories, and any other personal and business assets. The FLP is a tax neutral entity. Unlike a corporation, you can freely transfer assets in and out of the Family Limited Partnership without worrying about an adverse tax effect.
Establishment of an FLP
The first step to take is to properly establish a FLP based on the customer’s needs. The partnership agreement must be precisely worded and ownership must be determined. Assets must be legally transferred to FLP. Once this is done, your assets are protected. The FLP must be filed with the appropriate state official, usually the person who runs the corporations. Check with your state division of corporations to determine the requirements and fees required for proper filing.
How does it work
If a judgment is obtained, the creditor must obtain an indictment against the company from a court of competent jurisdiction. The charge order entitles the creditor to the debtor’s share of the FLP distributions. However, if no distributions are made, the creditor receives no money. The general partners who are the managing partners of FLP maintain control of any distribution. If the partnership has earnings that are not paid to the partners, the creditor receives a K-1 tax form just like all partners. The amount indicated on this tax form must be included on the creditor’s income tax return and pay any taxes to the IRS on the money that was never received. As a consequence, few creditors request a charge order. The association agreement is confidential and is not filed with any government agency. Limited partners are not listed in any government filings, so complete anonymity is provided.
Implementation and Design
A Family Limited Partnership (“FLP”) is a partnership formed by family members to assist in the preservation, management, and maximization of family assets. Typically, the partnership is managed by a family corporation to ensure the viability of the partnership for subsequent generations. FLPs can provide solutions to many of the critical challenges families face, such as:
• Adequate administration of family assets during the life of the older members of the family.
• Capitalize full value as assets are transferred to heirs.
• The reduction of current income tax
• Reduction of the taxable value of family assets
• Help gift goods to family members
• Safeguard family assets from unwarranted claims by creditors.
Organization of a FLP
In an FLP, a family’s assets are contributed to the partnership in exchange for limited partnership units. The division of the units is generally done between the family members who are the limited partners and one or more corporations, LLCs or trusts that own the largest number of units as general partners. General partners are the managerial side and limited partners have no say in the operation of the business. The association will pay the general partners the fees for the services rendered. Those fees are deductible by the partnership and, in turn, are income for the general partner. All typical company business expenses are allowed under IRS regulations as with any business.
Advantages of FLP income tax
Once properly prepared and with the consent of the general partner or as determined by the Association Agreement, any of the units held by any limited partner can be gifted to family members, purchased by a trust in exchange for a note or donated to charity in any way desired. If donating to a charity, the grantor will receive an income tax deduction for the fair market value of the donation. Please note that not all options are necessary or advantageous for limited partners, therefore appropriate advice from experts in the field may be needed.