Family Limited Partnerships for Enhanced Asset Protection
In most instances, partnerships are set up to run a business. However, the formation and operation of a Family Limited Partnership (“FLP”) in Texas is a sophisticated estate-planning strategy that can provide maximum asset protection from liabilities and estate taxes.
The experienced team at Anderson Estate Planning understands how to create FLPs tailored to your specific objectives and family dynamics. We invite you to explore this option with us to get a better feel for the benefits offered through this type of arrangement.
Overview of FLPs
From a strictly legal perspective, an FLP is structured the same way as any other type of limited partnership, except that all partners are members of the same family. Limited partnerships consist of two classes of partners: general and limited. The partnership agreement defines the rights and responsibilities of these different types of partners. Usually, general partners have full control—and all the rights to manage—the enterprise. Limited partners hold an ownership interest but generally have no control and do not participate in daily business operations.
When an FLP is used for estate planning and asset protection rather than purely for business operations, certain family members form the partnership and transfer their assets into that partnership. They may serve as general partners and often gift limited partner interests to their children or other family members over long periods of time. Because they are giving away only limited partner interests (which have no management authority over the partnership), they maintain full control, use, and enjoyment of all the assets in the FLP while decreasing the value of their estate, which reduces estate taxes.
How FLPs Protect Assets from Creditors and Lawsuits
When families accumulate wealth, their assets are at risk due to many different factors. The government imposes onerous taxes when wealth is transferred from one generation to the next. Assets can be lost in lawsuits, if someone suffers an injury on family property or in an automobile collision or other type of accident caused by a family member. Creditors, former spouses, and disgruntled business associates and employees try to seize family assets. Physicians and other licensed professionals are subject to legal actions for claims of malpractice.
When these situations arise, an FLP can provide asset protection in numerous ways, including:
- Reducing or eliminating estate and gift taxes by transferring limited partner interests to children or other family members at a discounted value (i.e., compared to the full taxable value of general partner interests that have authority to use and control the FLPs assets) during the combined lifetimes of partnership’s creators.
- Sheltering assets from future lawsuits and creditor claims against an individual under the unique protection laws of partnerships. Partnerships offer stronger asset protection than corporations and limited liability companies.
- Clearly delineating assets in the limited partnership as separate property that is not subject to division in a divorce.
– As an additional layer of protection, the partnership agreement can further specify that any partnership interests involuntarily awarded and transferred to a divorcing spouse triggers a repurchase option so that family assets will remain within the family.
– Also, any inherited partnership interests—as well as any assets in the inherited partnership—are the new owner’s separate property by law. This means parents can be assured that the partnership and its assets are protected from a potential divorce in subsequent generations.
- Reducing portfolio maintenance expenses because management of investment accounts, mineral interests, residential and commercial rental properties, and other valuable assets can all be consolidated in the partnership.
In addition to protecting assets from creditors and liabilities, an FLP makes it easy to transfer undivided interests in complex assets to various family members. Unlike an irrevocable trust, an FLP also allows greater flexibility in changing terms or investment strategies.
Find Out More About an FLP Could Benefit Your Family
FLPs can be closely scrutinized by the IRS and other agencies, so it is important to take care when creating and operating this type of entity. Mistakes can be very costly.
At Anderson Estate Planning, we understand these intricacies and we know how to structure FLPs properly to achieve maximum asset-protection and estate-tax reduction. To discuss the benefits a Family Limited Partnership could provide in your unique situation, contact us to arrange a confidential consultation at your convenience.