Family Limited Partnerships (FLP) are an effective asset protection technique. Correctly executed clients can reduce estate and individual income taxes. In addition FPL’s allow clients to manage their assets while protecting them from creditors.
There are two types of FLP partners; general & limited partners. General partners have authority to make decisions and are in complete control while limited partners have no decision-making authority and control.
USA law restricts creditors to obtain any interest in the FLP partnership and when structured correctly offer FLP partners anonymity. FLPs are very popular today as an effective domestic asset protection technique.
Generally FLPs are used to protect clients’ assets; real estate, stocks & bonds, cash, jewelry, furniture and fixtures and other personal and business assets. Generally the FLP is unique in that it is a tax neutral entity. Thus, unlike a corporation usually you can freely transfer assets in and out of the FLP without worrying about an adverse tax effect.
FLPs are formed and custom designed to our clients specific needs by drafting the FLP partnership agreement. All protected assets must be properly identified, retiled and transferred into the FLP.
If creditors win a judgment against you, they must also get another judgment called a charging order against you. That allows the creditor to attach the right to your share of the distributions from the FLP. If the FLP does not distribute anything, then the creditor gets nothing. Creditors cannot take your place as a partner and cannot force the FLP to distribute assets.
If the FLP has undistributed profits, the creditor receives a FLP K-1 and must report and pay to the IRS tax on the creditor’s individual income tax return. Thus few creditors ever seek to win a charging order since they must pay money to the IRS on income they have not received and probably never will receive.