The_Family_Limited

The Family Limited Partnership

The Family Limited Partnership (FLP) is an entity that serves at least three valuable objectives: (1) Its structure makes its use attractive to save estate taxes for the principal family members; (2) It provides for a pass-through of income to the individual partners to save income taxes; and (3) It proves an attractive way to protect assets of the family from the claims of creditors.

Let’s examine the various asset-protection aspects of a FLP in a Question and Answer format:

What is a Limited Partnership? A limited partnership is a hybrid entity that combines the limited liability of a corporation with the tax benefits of a general partnership. A limited partner’s exposure to any claims against the limited partnership is limited to the amount of the limited partner’s capital contributions. However, a limited partner is required by law to have at least one general partner, who is unlimitedly liable for the limited partnership’s liabilities.

What is the structure of a FLP? The FLP is a limited partnership designed for family asset protection. Initially, assets are either sold or contributed to the FLP by the owners of the assets. Thereafter, typically limited partnership interests are gifted to the junior members of the family. Often, these are the children of the family. Sometimes the grandchildren are also made limited partners. The parent or parents are the general partners, unless another entity, such as a corporation or limited liability company becomes a general partner.

What assets can be held by a FLP? The best assets to be contributed to a FLP are financial assets, such as stocks, bonds and other marketable securities. Real estate of almost all types, such as garden apartments, shopping centers, office buildings and vacant land can also be contributed to a FLP. Under normal circumstances, however, a family’s residence is not transferred to the limited partnership because of questions about the tax treatment of the sale of a residence by the partnership.

What happens if you are sued and lose? If the worst happens and you are sued by someone as the result of an accident or other cause not related to the assets in the trust, and you should lose the suit, a creditor could attach your interest in the family limited partnership. However, New York law provides that all such a creditor would get from such an attachment is what is called a “charging order.” This “charging order” gives the creditor the right to receive whatever the General Partner elects to distribute on account of your interest in the partnership. And, retaining control over the operations of the partnership as general partner or officer of the general partner, this is an amount that you control. The assets in the limited partnership are untouched by the “charging order.”

In Part II of this discussion, we will examine the income tax problems a creditor may face if a limited partnership interest is attached and what happens to a partner’s interest at his death, and other aspects of ownership of an interest in a FLP.

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Last modified: December 27, 2007

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