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FLP Primer

     The Family Limited Partnership (FLP) has been a popular business entity for wealth management, tax minimization and wealth transfer maximization. Under the right circumstances, FLPs traditionally helped taxpayers remain in control of their wealth even after transferring it to their loved ones. Additionally, many of these transfers were made at a significant discount, thereby further leveraging wealth transfer tax savings. Not surprisingly, while FLPs have been employed as a planning panacea by taxpayers, FLPs have received the evil eye from the IRS and some courts with increasing frequency.

Background

     Simply put, an FLP is a Limited Partnership among family members. The FLP is often created by the wealth-owning generation, typically the parents. The FLP creators are initially both the General Partners (GPs) and the Limited Partners (LPs) at the time they contribute assets to the FLP. The lion's share of the contributed assets is thereafter assigned to the LP shares. Even so, the GPs hold all of the management control over the FLP assets.
     When the FLP assets generate income, the GPs are entitled to compensation for their management services. LPs enjoy an ownership interest only. They have few rights or power and there are restrictions on the transferability of their LP interests. This lack of control (minority interest) and inability to transfer the LP interests freely (lack of marketability) reduces or discounts the value of the FLP assets. In turn, this discounting enables the parents to transfer more wealth (and the future appreciation of that wealth) via their LP interests to younger family members, yet retain lifetime control over that wealth.
     Other benefits include income splitting and asset protection, since FLP-income may be spread among multiple family members, and creditors of the LPs may be limited in their attempts to reach the underlying FLP assets.

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Asset Protection Strategies

     Statistically and anecdotally, we all know that the number of divorces, lawsuits and bankruptcies is staggering. While no one believes lightning will strike them, wealth created through a lifetime of work, saving and investing can be lost overnight if these forms of man-made lightning do strike. To protect your assets from such disaster, proper risk management strategies should be given careful consideration. These strategies include exempting your assets from the claims of creditors, limiting your liability through legal entities, and transferring your risk through insurance.

Exempting Assets

     State and federal laws may exempt some of your assets from the claims of creditors. Depending on your state of domicile (i.e., your legal residence), the equity in your primary personal residence may be protected from creditors. Protection also may extend to your retirement funds and even the cash value of your life insurance.
     Once you have identified the protected asset classes available to you under applicable law, it may be prudent to maximize your protection by converting non-exempt assets into exempt assets. For example, if the equity in your home is exempt from the claims of creditors under the laws of your domicile, then using non-exempt resources to pay off your mortgage may be a smart move.

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