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Asset Protection Planning: Control Everything but Own Nothing by: Mark Fishbein

Asset Protection Planning tip by Mark Fishbein, Tucson, AZ

ALTA Estate Services, LLC: News Article
February 26, 2022

Family Limited Partnerships

Family Limited Partnerships (FLPs) are legitimate estate planning, wealth preservation, and asset-protection vehicles. FLPs can be looked at as a joint venture between family members. Placing assets into FLPs can legally and successfully protect everything you own from attack by creditors. FLPs are especially important for practicing licensed professionals such as doctors, engineers, and business owners.

The structure of FLPs consists of general partners and limited partners. The general partner and limited partners cannot be the same people. However, a separate entity such as a limited liability company owned and controlled by you and your spouse can act as the controlling parties and therefore easily satisfy this requirement.

The general partners, you as the client (and your spouse) or a separate entity owned and controlled by you (and your spouse), manage and control the FLP. General partners decide whether to buy or sell an asset, what investments the Partnership should make, and whether to make distributions of profits. The general partners even decide whether to dissolve the FLP. Just as before you set up the FLP, you and your spouse (either individually or through a separate additional asset protection legal entity) control the assets and make operational decisions regarding the assets.

By law, limited partners do not have any control over how the partnership is run. Moreover, limited partners do not have any voice in the management of the partnership. The limited partner is typically either the children or revocable trust.

Benefits of Family Limited Partnerships; Asset Protection

An effective tool, the family limited partnership is set up for asset preservation, asset protection, and estate planning. With careful structuring, you can place assets into the FLP to protect your assets from attack by creditors. This ensures future financial security for your loved ones.

Clients implement FLPs into their planning to safeguard assets from attacks from creditors. “Assets” are broadly defined and include homes, cars, boats, jewelry, business interests, cash, bank accounts, brokerage accounts, stocks, bonds, art and other collections, real estate, etc. “Creditors” are also broadly defined and include actual and identifiable probable creditors. Identifiable probable creditors include litigants, soon-to-be ex-spouses, disgruntled business partners, or anyone who you know has a claim against you, even if they do not yet know it.

The effectiveness of an FLP has been codified as law, and thus the actual asset protection provided is statutory. Adopted in all fifty states, the Revised Uniform Limited Partnership Act (RULPA) provides that the assets owned by a limited partnership are not owned by the individual partners. Therefore, after creating the FLP, only 1% of the assets in the FLP are exposed to creditors. If children are sued, the creditor will only be able to obtain an order against their limited partnership interest. Essentially, a charging order entitles the creditor to “stand in the shoes” of the limited partner/debtor and collect on their benefits as a limited partner.

Another advantage to using an FLP as an estate planning and Asset Protection Planning tool involves taxes. When an asset that is placed in the FLP generates returns, those returns stay in the FLP rather than the parent’s estate. In other words, on the parent’s death, the estate focuses on the asset’s value at the time it was transferred to the FLP. For example, a piece of investment property valued at $100,000 at the time it was transferred into the FLP is included in the parent’s estate at this $100,000 valuation even though it has increased in value to $250,000 by the time of the parent’s death. The gain in value belongs to those holding an interest in the FLP.

Strategizing for a Successful Family Limited Partnership

To obtain the intended benefits of the FLP, it is vital that the client works with experienced professionals. Aside from working with experienced professionals, it is important to keep a few points in mind to ensure you obtain the benefits of an FLP as intended. First, make sure that you keep sufficient assets outside of the FLP to maintain your standard of living. In addition, do not mix FLP and personal assets. Make sure to keep clear records on both your personal and the FLP assets. Moreover, define a clear business purpose for the FLP. If you intend to protect assets from creditors or manage your assets more effectively, document your purposes.

If you are interested in protecting your assets from potential creditors, call us to schedule an appointment to learn if the FLP is an appropriate estate planning strategy for you.

Mark Fishbein Tucson, Estate Planner Tucson AZ www.altaestate.com, Asset Protection PlanningFeel free to call the ALTA Estate Services, LLC office at (520) 797-1400 to learn more about proper and complete estate planning, including the Emergency Telephone Hotline Program afforded to you and your family members at no charge during times of crisis and the other benefits of estate planning described above. Mark Fishbein, Tucson, AZ.

The text above is for general informational purposes only and should not be considered as legal advice.

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