Dallas W. Jolley

Attorney and

 Counselor at Law


(253) 761-8970

dallas@jolleylaw.com


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Asset Protection,
Family Limited Partnerships & Limited Liability Companies

Asset protection planning involves a variety planning techniques that can be as simple as having proper liability insurance to being as advanced as having one or more offshore trusts. This page will explain how to limit your liability through creating and funding an entity that can insulate your personal assets from creditors. Most importantly, asset protection planning must be done before any liability or possibility of liability is on the horizon. Planning early and completely is the key to proper asset protection planning.

What is a "family limited partnership"?

A family limited partnership (FLP) is a partnership that has both general and limited partners. The general partner of an FLP has full control over the FLP even if the general partner owns a small percentage of the FLP. The limited partners are passive investors and have few rights in the partnership. Limited partners have liability only for the amount of money or property that they contributed to the FLP. The general partner, however, has unlimited liability.

Does a family limited partnership have additional benefits?
Yes! The following are additional benefits 
of using a family limited partnership:

1 - An FLP can reduce the management costs associated with multiple investments and can increase investment returns by
adopting a consistently applied investment philosophy.
2 - It can simplify annual giving, especially for real estate and other assets that may be difficult to give away on a piecemeal basis.
3 - With proper drafting, an FLP can prevent family assets from going outside the family.
4 - An FLP may be used for asset protection.
5 - An FLP can be more flexible than an Irrevocable Life Insurance Trust for purposes of making gifts.
6 - An FLP can create initiative among children and prevent large gifts from reducing their incentive to work.
7 - Because general partners control an FLP, there is less likelihood of litigation among family.

What are some other advantages of the family limited partnership?

The general partner can distribute assets directly from the partnership to the limited partners at any time that he or she decides the limited partners deserve or need the money. A partnership can be amended if all partners agree, unlike an irrevocable trust, which cannot be changed. A general partner can receive a reasonable fee from the partnership for managing the assets. Combined with a GRAT, income can flow out to the general partner only. Family limited partnerships can also be used for purposes of asset protection. Because the laws in most states do not allow creditors to take limited partnership interests or force the partnership to pay out money, creditors find it difficult to satisfy judgments. People concerned about creditors who may not be legitimate use FLPs for this type of planning. FLPs can provide administrative ease and great economies of scale because diverse assets can be put into them and then can be managed more effectively by the general partners.

What is the tax purpose of an FLP?

An FLP is one of the most effective methods for a person to make gifts to children, grandchildren, or others. The reason that an FLP is so effective is because limited partners cannot force liquidation of their holdings, they have no power to force the general partner to distribute the earnings of the FLP, and they cannot give their limited partnership interests away or sell them without the permission of the general partner. Thus the value of the limited partnership interests is subject to a discount when calculating the fair market value of these interests.Here is how an FLP usually works: Ellen and Joseph Barnes want to give their children and grandchildren a parcel of real estate that is worth $1 million. Ellen and Joseph would like to retain control of the property and not pay gift tax to make the transfer. They form the EJB Limited Partnership. Ellen becomes a 1 percent general partner, and Joseph becomes a 1 percent general partner. Each of them becomes a 49 percent limited partner. Ellen and Joseph then give each of their three children a 20 percent limited partnership interest, and they give each of their two grandchildren a 5 percent limited partnership interest.After the gifts are made, Ellen and Joseph still have full control because they are the general partners. The children and grandchildren own a total of 70 percent of the FLP, but have no control and cannot give away or sell their limited partnership interests. Even though Ellen and Joseph made a gift of $700,000--70 percent of the value of the real estate for gift tax purposes--the gift tax value of the gift was much less. Because the limited partnership interests were subject to so many restrictions, their value was discounted by almost 40 percent by the appraiser hired by the Barnes. For gift tax purposes, the amount given away was only $420,000. When either Ellen or Joseph dies, their limited partnership interests will likely be subject to discounts in their estates.To the extent they have made gifts, the future appreciation of the real property and other assets in the FLP will go mostly to the children and grandchildren; the FLP has helped slow the growth of the Barnes's estate.

How great are family limited partnership discounts?

The generally accepted discounts run as high as 40 percent. However, there are instances in which discounts of larger amounts have been much higher. The amount of the discount depends on the terms of the partnership agreement, the type of property put into the partnership, and to whom gifts of limited partnership interests are given.
For example, it is possible to get greater discounts if some of the limited partners are not related to the general partner. Caution: It is imperative that an appraiser who has solid credentials in the appraisal of family limited partnerships for purposes of federal estate and gift tax be used to determine the amount of the discounts in the FLP. An inadequate appraisal will jeopardize the benefits derived from using an FLP for estate planning.

What are some of the pitfalls to the family limited partnership?

A key ingredient to a legitimate FLP is that it must have a business purpose. Just using an FLP as an estate planning discounting device or a creditor protection plan is not legitimate. However, managing a portfolio of securities or some real estate property is considered acceptable. The cost of setting up an FLP can be relatively high, and the administration costs can also be high. Aside from needing a lawyer to draft the partnership agreement, you have to pay a valuation expert to appraise the assets for discounting purposes and you may be required to pay filing fees to the state.

Who should not create a family limited partnership?

FLPs don't work well for people whose main asset is their primary residence. If you transfer your home into your partnership, you don't own it anymore. To maintain the estate and gift tax benefits, you have to pay rent to the partnership to live in it. Also, people with smaller estates may not want to create an FLP because the cost does not justify the benefit derived. FLPs are sophisticated gift, estate, and asset protection tools. They are complex and need to be established by very experienced advisors. If you are not willing to do a complete FLP plan with the best advice available using excellent advisors, an FLP is not for you.

Limited Liability Companies

Limited Liability Companies ("LLC") can provide most the advantages of the family limited partnership. Most commonly, we recommend establishing an LLC as the entity to own your real property holdings. Call today to schedule your free consultation to discuss asset protection planning, and go the the Brochures and Questionnaire page and read the article about family limited partnerships, and review the questionnaire you should bring with you to your appointment.

IRS CIRCULAR 230 DISCLOSURE 

To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, if any U.S. federal tax advice contained in this communication, (including any attachments) is not intended or written to be relied upon or used, and cannot be relied upon or used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction of matter addressed


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