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Family Limited Partnerships.

By Rob Lambert - Email Editor

Date: Janc 12, 2006

Last week I promised a series of short newsletters dealing with the multitude of issues surrounding the much touted FLP, LP, LLC and corporate (both C and S) entities.

Today I thought I would start with the FLP, which has received so much press over the last decade.

First, what is an FLP (which stands for Family Limited Partnership)? This always generates a lot of hate mail; but, here goes: A FLP is exactly the same as a plain old limited partnership except it costs more! Fifteen years ago, practitioners were doing plain old limited partnerships as part of many estate plans. The reason for having a limited partnership was, for estate purposes, so that they could reduce the value of the stock held by the Limited Partners (usually the children) because the Limited Partners have no control. This common technique became very popular and soon after was the target of intense attack by the IRS. (I will devote an entire newsletter to this single issue, so watch for it!) Well, about fifteen years ago, a lawyer with marketing sense changed the name from plain old limited partnership to Family Limited Partnership and raised his prices for this fancy new entity. The race was on.

FLPs are great entities, but not for the reasons they are often marketed for. They are sold with glowing promises of their Asset Protection prowess: charging order protection. The sales pitch goes something like this: Put your stuff into your brand new FLP, and you will retain control by virtue of your status as the General Partner. When your creditors come along, they won't be able to get to the stuff in the partnership…. All they can get is a charging order, which lets them get the stuff ONLY if the General Partner (you!) allows a distribution. Well, this has been so thoroughly abused by every Tom, Dick and Harry trying to run off with his scrub nurse that many courts are totally disregarding charging order protection in many cases. Once again, I will devote an entire newsletter to this issue; however, for the purpose of this newsletter, just believe me that charging order protection is “iffy” and fragile at best. I never rely on it, and neither should you.

WHY DO I LIKE FLP'S SO MUCH IF THE CHARGING ORDER PROTECTION IS NOT RELIABLE? Simple: They are great entities to separate ownership from control. The General Partner by statute and tradition has all of the control. The Limited Partner has no say so at all. We aren't relying on some great drafting to make this happen (as you have to do if you try to use an LLC to separate ownership from control). We simply rely on the partnership statute in each state to do this for us. I often make my client the General Partner (with little ownership, say 1 percent and sometimes less) but 100 percent of the control. My clients like this since by nature they are self-made, and therefore, control freaks. At the same time the Limited Partner (who cannot exercise control by statute) can have the majority of ownership (often 99 percent). Note that this Limited Partner, who has the majority of ownership, but NO control at all, is a difficult target for some contingent fee litigator claming that the FLP committed a tort or did something wrong. WHY? Because the Limited Partner has no power to exercise any control, and therefore, should not be responsible for the bad acts of the FLP. I often make the client's Kinetic Asset Protection Trust the Limited Partner. This is a great set up because it keeps the Trust out of harms way, and keeps the client/control freak in control (at least when the financial seas are calm).

I hope this FLP Tid-Bit was helpful. More next week…

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