When you have significant assets, including business assets, one of the most important things you can do for yourself and your family is to protect those assets. Effective estate planning can help maximize the portion of your assets that you or your heirs will keep and minimize their exposure to lawsuits, liability and taxes.
While there are several estate planning tools available to protect wealth and business interests, family limited partnerships offer far-reaching protections that few other tools can offer. Read on to learn more about family limited partnerships and whether they might be right for you.
What is a family limited partnership?
A family limited partnership (FLP) is a partnership agreement between family members who are engaged in a business together. The agreement establishes the various family members’ rights to control and income, and the partnership, rather than the individual family members, “owns” the partners’ selected individual, family, and business assets.
An FLP has two types of partners: general partners and limited partners. General partners maintain virtually all control of the FLP and its assets. They are also exposed to liability relating to the partnership. Limited partners have very limited or no control over the assets in the FLP but are protected from liability.
How does an FLP work?
Family members transfer personal, family, and/or business assets to the partnership. The FLP then protects those assets from creditors as long as the partnership itself is in good legal standing. Because the FLP – not the individual partners – owns the assets, any wrongdoing by one partner will not expose the entire partnership to liability or claims of creditors. Because of this, FLPs are very effective tools for protecting significant wealth and assets.
What are the main benefits?
There are many benefits to establishing an FLP, among them:
1. Protection from creditors: Creditors will not be able to touch assets that are owned by the partnership, unless the partnership is somehow at fault.
2. Protection from liability: As noted above, the actions of individual partners will not expose the entire partnership to liability. Only the actions of the partnership as a whole can result in liability problems for the FLP.
3. Lower income taxes: By transferring income-producing assets from your personal ownership to the FLP, you can help minimize your income tax burden.
4. Easily pass ownership of assets to family members: By naming children or others as limited partners, you are able to retain control of your assets while ensuring they are smoothly transferred to your heirs later on.
When is the best time to establish an FLP?
As with most aspects of estate planning, the sooner you can put protections in place, the better. Waiting until something is threatening your assets – such as a lawsuit – will leave you with few options. It is best to establish an FLP before you need it.
How do you know if an FLP is right for you?
The best way to ascertain whether an FLP makes sense for your situation is to speak with an experienced estate planning attorney. A lawyer who understands complex estate planning will be able to assess your specific situation and determine whether an FLP or a different estate planning tool will best accomplish your goals.