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More On The Pirates and FLPs.

By Rob Lambert - Email Editor

Date : October 2, 2008

Dear Valued Reader,

Last week’s rant generated a lot of responses.  It seems like a lot of  you agree with me that we should let the pirates die.  It may hurt more in the short run, but we won’t be using our tax dollars to reward the same folks who damaged their businesses and devastated our economy, not to mention many common citizens.

The rant also motivated a number of lawyers to call offering to help the lady whose credit was decimated by a lender over a 5 cent underpayment. This lender is owned by J.P. Morgan Chase, certain to be a big beneficiary of a bailout if it happens.  It is my hope it does not.  I will keep you up to date on this matter as it seems to have hit a real cord with many of my readers.  The lawyers are starting to work and I should have some news in a few weeks.  Let’s hope so.

Now, to the meat of the newsletter.

SOME OTHER REASONS I LIKE FLPS

In last week’s newsletter I explained that the main reason I like Family Limited Partnerships is that they are a great tool for separating ownership from control.

This week I promised to share a few other reasons I like FLPs for estate planning and Asset Protection purposes.

How does this work?  Again, there are many variations on this theme, but they all center on the issue that ownership without control is worth less, sometimes substantially less, than ownership with control.

How is this reduction in value accomplished?  Again, it comes down to the wonderful capacity of a limited partnership agreement to separate ownership from control. This is best explained by an oversimplified but useful example.

Let’s assume that you want to pass an interest in a business upon death or before to a child.  You could simply give the child the interest.  If this interest consisted of 80 percent and allowed the child all the rights and benefits of ownership including the right to vote, the transfer will generate a tax on the full fair market value of the interest transferred. Instead, if the same business were owned by a FLP and the child received the same interest in the form of a limited partnership interest, the child would be receiving a less valuable interest.  WHY?  Simple, the child can’t exercise any control over the business if all he has is a limited partnership interest. There is no vote.  No right to control the company. I have seen estate planners take a reduction for lack of control of 50 and even 60 percent.

This technique is common and often overused and abused; however, it does work. If you are not a pig and are reasonable in your valuation, it works well [isn’t this normally the case!).

Note that similar planning is possible with corporations transferring stock (it’s pretty straight forward to put restrictions on the stock which reduces its value) and also with membership interests in LLCs.  The problem with using LLCs to create different classes of membership interests is that you need to be a very good wordsmith to do this well, while it is nearly automatic with a FLP.

I also like FLPs because they are easy to form, operate and relatively inexpensive.

Remember my rule that all important assets and businesses should be in separate, stand alone entities.  Always divide and conqueror.  With that said, also remember not to fall for the bull that FLPs are great stand alone Asset Protection entities because they are not.  They are a good start but not enough alone.

Next week I take on LLCs and then I will be moving on to techniques to help when you have a bad real estate loan or are upside down in a piece of real estate.

One thing is for sure, with the economy melting down, Asset Protection Planning is more important than ever.

Have a healthy and protected week.

Rob Lambert

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