The Family
Limited Partnership Explained
Strategic Advisors Inc.
is also able to provide you with a family limited partnership. Let’s
first examine what a family limited partnership is. The family
limited partnership (FLP) is a popular way to separate liability-producing
assets and turn attractive assets into unattractive assets.
For example, you might own one apartment house and a nice stock
portfolio. You can separate your apartment house into one family
limited partnership and put your portfolio into a different family
limited partnership or an asset protection trust. It’s not a good
idea to put liability-generating assets into a trust.
The trust should
hold non-liability producing assets, normally bank accounts and
securities. Sometimes you may put a home, which requires the
services of a local expert to transfer. IF a client holds
liability-producing assets in his or her own name such as a business
or an apartment house, these should be put into a FLP for protection.
If a client owns stock in privately held businesses, this stock
should and can be put directly into the trust.
That way if
there is a slip and fall at your apartment house and you are sued,
the creditors can’t attack all of your assets. By putting the apartment
house into the limited partnership, the judgment creditor cannot
seize either the apartment house or the stock portfolio; instead,
they must get a "charging order." This means the judgment
creditor can only attack the asset involved in the litigation…in
this case that would be the apartment house.
A family limited
partnership is a way of separating ownership from control. A family
limited partnership has three parts:
1.The investment
(the apartment house)
2.The limited
partner (who has no say in what is distributed or done in regards
to the investment)
3.The general partner (who has complete say in what is done).
Here’s how
it works. We give the limited partner 99% ownership and 0% control
with no liability. We give the general partner 100% control and
1% ownership. (See
Diagram- image) The limited partnership interest is held
by your asset protection trust. If a creditor tries to attach a
judgment to the family limited partnership, you (the general partner
with all the control) get to decide how much, if anything, to distribute.
The process is outlined by the Uniform Limited Partnership Act,
which says the judgment creditor only gets what the general partner
(you) decides to distribute...which is often nothing.
The folks who
wrote the Uniform Limited Partnership Act inserted this charging
order concept into the act to prevent the creditors of a partner
from wreaking havoc on the partnership business. However, these
same provisions can be utilized in the family limited partnership
context to prevent the distribution of funds to the judgment
creditor. This is because under the law the general partner,
who is likely to be the establisher of the asset protection trust,
can prevent distributions.
An additional
little bonus is that the Internal Revenue Service has also held
in Revenue Ruling 77-137 that the creditor with a charging order
is treated as a substituted limited partner for tax purposes.
As a result the judgment creditor is burdened with the tax bill
resulting from ownership without gaining the ability to force a
breakup or a sale of the partnership or distributions from the partnership.
In other words, he gets no money but acquires the tax responsibility.
Strategic Advisors Inc.
can set up a family limited partnership for you. The investment
is $2,500 for the first one and $2,200 for each subsequent FLP.
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