The Family Limited Partnership (FLP) is probably the most effective entity available for asset preservation and asset protection, and estate planning. Although you “can’t take it with you,” by placing your assets into FLPs you can legally and successfully protect everything you own from attack by creditors. By doing this, you assure for your future asset protection and future family financial security. This is especially important for practicing licensed professionals such as doctors, engineers, and business owners.
Primary Goal: Asset Protection
The purpose of asset protection is to safeguard personal wealth and assets from attack 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 creditors as well as identifiable probable creditors, such as litigants, soon-to-be ex-spouses, disgruntled business partners, or anyone who you know that has a claim against you, even if they do not yet know it. Creditors may even include government agencies such as the I.R.S.
The effectiveness of an FLP in providing asset protection is statutory, meaning that it has been codified as law. The Revised Uniform Limited Partnership Act (RULPA), which has been adopted in all fifty states, provides that the assets owned by a limited partnership are not owned by the individual partners.
Therefore, those assets cannot be attached by the personal creditors of a partner. If a person contributes assets to an FLP, those assets are no longer owned by that person (although, as explained below, the person may still control those assets), and creditors of that person may not attach those assets merely because they have a judgment against a partner of the FLP.
The Essence of Asset Protection Planning: Control Everything but Own Nothing.
A family limited partnership is, by definition, a joint venture between family members. The partnership is comprised of both general and limited partners. You as the client (and your spouse) or a separate corporate entity owned and controlled by you (and spouse). The General Partner controls all management of the FLP and its assets.
The general partners manage and control the FLP. The general partners decide and implement all decisions of the FLP such as whether to buy or sell an asset in the Partnership, what investments the Partnership should make, and whether to make a distribution of profits from the Partnership. The general partners may even determine to dissolve the FLP. It should be apparent that the general partners control the operation of the FLP in their absolute discretion. You and your spouse or family members (either individually or through a separate additional asset protection legal entity which you control) will be the general partners of the FLP. Therefore, you (and your spouse) continue to control the assets and make the decisions regarding those assets just as they did before the FLP. Although they transferred legal ownership or “title” to those assets to the FLP, they retained control.
The limited partner of the FLP is usually either the children or your loving revocable trust. Note: 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.