1. an (F)LP allows you to control your assets without the liability of owning them;
2. judgements cannot reach to the debtor's limited partnership interest;
3. a properly structured (F)LP can possibly protect transfers made even after a claim arises and also protect against IRS claims;
4. an (F)LP is tax-neutral;
5. an (F)LP provides maximum operating flexibility; and
6. an (F)LP gives you the opportunity to better plan your estate and reduce estate taxes.
Because of its versatility and protective functions, most comprehensive asset protection plans include at least one limited partnership in one form or another.
STRUCTURING A LIMITED PARTNERSHIP
Partners in a limited partnership can distribute their ownership interest as they choose, which is an important feature for asset protection purposes. For example, you can contribute personal assets to the partnership and obtain in exchange receive only a small interest in the partnership. The remaining partnership interest can be owned by other family members. However, if the other family member is not your spouse, this can constitute a taxable gift. For example, if you contribute $50,000 to the limited partnership and your partner contributes nothing but receives an equal share, then your partner has in effect received a $25,000 gift. Have your accountant check the structure of your limited partnership to avoid tax problems and also to determine that the LP is your best choice from a tax standpoint.
LP’s for families are known as Family Limited Partnerships, or FLP. Usually formed by a husband and wife, they would contribute various income-producing or business assets in exchange for their respective partnership interests. While this is normal, it may not be the best strategy for an FLP. By its nature, an FLP is used to protect a family’s assets. Business interests, as well as automobiles and other “dangerous” assets should be left out of the FLP, to prevent contamination. For example, if the family car is transferred into the FLP, and is later involved in an accident, any judgement resulting from that accident can be attached to all the assets in the partnership. For this reason, an FLP should only hold “safe” assets - those assets that are unlikely to be involved in creating a lawsuit, or creditor. There are other ways to protect those assets that are left out of the FLP.
In the usual FLP, Mom and dad, for example, may each receive a one or two percent interest as the general partners (general partners can be held liable; limited partners cannot). As co-general partners they would equally control the partnership the same way they controlled the assets prior to the FLP. Mom and dad may then receive, as limited partners, the remaining in the limited partnership. This allows mom and dad exclusive and equal ownership as well as control of the partnership, just as they had enjoyed with their assets when they were titled in their name. The one difference is that their assets are now fully protected. Judgements and creditors can only reach the one or two percent allocated to the general partners, and in cases where the FLP agreement prohibits it, said creditors may not assume that ownership interest nor any control over the assets of the FLP. Remember - an FLP should only include safe assets, such as cash, rare coins, art, collectibles, personal belongings - any assets that are not likely to cause any judgement that could taint the remaining assets.
Dangerous assets can be separated from all other assets by using a Limited Liability Company (LLC). If you own rental properties (dangerous asset due to lawsuits, fires, flood etc.), each unit should be transferred into it own, separate LLC. If a judgement is found against that property, only that property is vulnerable - all others have been insulated. Note that all LLC’s can be owned by your FLP without contaminiating the FLP, provided the FLP merely owns the LLC, and not the LLC’s asset(s).
Hubby and wife may later change their limited partnership interests. Perhaps the wife will obtain the greater interest. Or hubby and wife may gradually gift their limited partnership interests to their children or to a living trust, children's trust, dynasty trust or other type of trust or entity, which may also own a portion of the limited partnership. The FLP can work very well for family estate planning, The FLP structure is never permanent. Partners in an FLP can always sell or gift partnership interests, subject only to those restrictions in the partnership agreement, and thereby reduce estate taxes.
THE ROLE OF LIMITED LIABILITY COMPANIES
A limited liability company, like the LP and FLP is tax neutral. Transfers can be made in and out of it without tax repercussions. And, like the (F)LP, the partners control the assets with limited liability.
An LLC is most useful for insulating dangerous assets from safe assets. A rental property, for example, can increase the possibility of judgements. Injuries to tenants, for example, can result in judgements that far exceed your insurance. If the rental is transferred into an LLC, any judgement brought about from ownership of that rental is limited to that rental and cannot affect any other assets you may own. Therefore, each dangerous asset - rentals, business interests etc. - should each be placed into a separate LLC. All LLC’s can be owned by your (F)LP without placing the (F)LP assets in jeopardy.
Example: you own your own home, $100,000 in safe personal assets such as cash, stocks, bonds, rare coins, jewelry and collectibles, as well as other valuable personal assets. You also own your own construction business. In addition, you have managed to accumulate two rental properties. In this case, you may first want to form an FLP and transfer all safe assets into it. This should not include vehicle or your personal residence. Next, form three different LLC’s - one each for the two rental properties and one for your construction business. Set up your FLP to own all the LLC’s. (Your vehicles will not be in any of these entities - keep them separate, as they are the most likely candidates to result in a judgement). Your home can be placed into a trust, as recommended by your accountant, and based on your personal needs and goals. Your assets are now nearly 100% protected against judgements and creditors.
If you are involved in a motor vehicle accident, for example, and the other party sues you, there is nothing for them to go after. All your assets are no longer yours - they belong to either an LLC or an FLP. Therefore, the person suing has no choice but to accept a settlement from your insurance company. If a tenant gets injured and sues, they cannot attach any assets except the property in which they were a tenant, because they can only sue the LLC that owns it. Since that property is likely mortgaged to the hilt, and has debts, it is unlikely they would go after it - their legal costs would exceed the amount they would receive. If your business gets sued, you and your other assets are insulated, and only your business is at risk, With no other assets owned by the business - and many debts - your business would simply file for bankruptcy, and once the judgement and debts are discharged, you start another business LLC under a new name, free of debts. The bankruptcy does not affect your personal credit, or that of other LLC’s or FLP’s owned by you. It only reflects on that now defunct business.
If you choose to pursue wealth, do so wisely, and with good planning. Because once you begin accumulating wealth, there will be no shortage of unscrupulous people who will try to take it from you.
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