The Role of the Family Limited Partnerhship (FLP) in Estate Planning

Family Limited Partnerships (FLPs) can play a significant role in a family’s estate and asset protection planning within their limitations. Here are some rules of thumb regarding the correct use of FLPs:

It's important to have control at the General Partner (GP) level – Whether a FLP "works" or not when challenged by creditors is determined by whether the GP is able to avoid collateral attacks by creditors. Simultaneously, if the GP is not correctly structured, then control of the FLP can be lost. Therefore, it’s important that the GP be structured correctly, because the real art of asset protection and estate is planning.

Don't overuse the FLP -- The FLP is one of many available techniques, and it should never be overused or made into a single large target. Thus, the percentage of the client's total assets that go into a FLP structure should be 25% or less and not more than 40% except in unusual circumstances. And avoid promoters who try to stick nearly everything into the FLP.

Always diversify – It's better to have several smaller FLPs than to have one oversized one. It's best that a new FLP be created for every $2 million to $5 million in assets. This keeps the profile of each FLP lower for both creditors and for any IRS audits.

Always treat the FLP as a business entity and not as a Family Trust – All the investment holdings of the FLP should be for business or investment purposes only, and all payments made by the FLP should facilitate those purposes. The FLP should not be used for personal family purposes, such as for the family home or for funding college educations. Should the family ever require money from the FLP, then the money should either be borrowed from the FLP at current interest rates or distributed from the FLP to the various trusts that are holding the interests, and from there given to family members.

Have a good operating agreement and a good law – The main key to a successful FLP is to have a good operating agreement custom-tailored to the family business. It is very important that the FLP be formed in a jurisdiction that limits the creditor’s remedy to a charging order, and does not easily allow liquidation of the partnership interests to satisfy creditors.

Have trusts own the children’s Limited Partnership (LP) nterests – With a little more effort, the FLP can provide substantially more asset protection if the LP interests are conveyed into spendthrift trusts formed for the children and not the children outright.

Maximize transfers – Transferring assets by parents to the FLP should be made immediately, and annual gifts of the LP interests should be faithfully made to the children’s spendthrift trusts.

Avoid the offshore urge – In order for them to generate higher fees, some promoters will encourage that LP interests are held in an offshore trust. But they will not tell you that for this arrangement to work you will have to flee the country to avoid being arrested and then thrown in jail for contempt of court. They will also fail to tell you that the case law establishes no advantage to having the LP interests foreign asset protection trusts as opposed to an arrangement of well thought-out, structured and drafted domestic trusts.

Give a wide berth to kits and promoters – If you should have enough in assets to justify having an FLP, then you should spend the extra time to go to a licensed tax attorney in where you live jurisdiction having experience in structuring these entities the right way, and assist you with transfers to the FLP. The kits and "one-size-fits-all" promoters cause more problems than they solve, meaning that there will later be additional costs to both undo past problems and do it right.