What are common reasons why I would need asset protection, as such is found in an FLP?
- Common reasons include if you are facing a current or expected lawsuit, you are in a profession with a high degree of liability, you are a debtor or guarantor, you face a potential tax or other governmental liability, you are about to receive significant wealth or you have accumulated or about to receive significant wealth.
What is a Family Limited Partnership?
- A Family Limited Partnership or FLP is an asset protection vehicle. The FLP is formed under state law, such as in Wyoming or Nevada, and all fifty states have adopted it. If a person owns and contributes assets to an FLP, he or she no longer owns these assets but may still control them. Creditors of that person may not attach those assets, such as real property, bank assets, financial institutional assets and business interests, merely because they have a judgment against a partner of the FLP.
What is the general structure of an FLP?
- An FLP is a joint venture between family members that is comprised of both general and limited partners. General Partners or GPs decide and implement all business decisions with the partnership, such as buying and selling assets, making investments, distributing profits and dissolutions. GPs retain absolute control over the running of the FLP and limited partners or LPs may not outvote the GPs. In this sense, LPs are similar to passive investors and are not entitled to payments or distributions, nor may they force the liquidation of an FLP. GPs remain in complete control.
Which assets should be placed into an FLP?
- The GP should analyze the risk of each asset being attacked individually, based on the chances that it would generate a liability. Treating each asset individually minimizes litigation exposure because assets contained in other FLPs would not be in danger.
What assets should not be placed into an FLP?
- FLPs are designed for passive assets only because assets such as cars, airplanes, boats and rental properties can cause personal and property damage, thereby creating the risk of litigation.
What are some other benefits of choosing an FLP structure?
Other benefits include that FLPs are not subject to probate and the value of a limited interest in a FLP means that more FLP interests can be gifted tax free to the next generation.
What are the limitations on FLPs?
- One may not establish an FLP or any other asset protection vehicle with the intention of defrauding creditors because it will be construed to be a fraudulent conveyance. The lookback for fraudulent conveyances is three years and one should have at least another valid purpose apart from asset protection such as estate planning and income tax minimization.
What is the duration of an FLP?
- The FLP is usually wounded down once there are no General Partners in existence. However, FLPs may be structured so that there is a seamless transition of GPs, normally transitioning from parents to children.
What are the costs of maintaining an FLP?
- These costs are minimal and mostly pertain to the initial opening of the FLP. States such as Wyoming and Nevada offer the most favorable treatment for FLPs.