Family Limited Parnerships & Tax

Tax planning in the U.S. is not new. Its history goes back to 1913, when Congress first approved tax-reducing vehicles such as trusts and partnerships. Nearly ninety years of supporting case law now agree that these instruments are the very foundations of business investment, charitable giving, and family stability.

Asset protection, however, is a relatively new addition to the legal landscape. Its demand has been driven primarily by the civil litigation explosion of the past fifteen years. While many financial planners in the 1980's and 1990's were looking offshore for protection, a small group of asset protection specialists chose to work with domestic laws that were already supported by the courts. These attorneys found out that, by expanding the scope of traditional tax reduction tools such as trusts and partnerships, they could provide lawsuit protection as well. The result is a new generation of domestic tax reduction entities retooled to protect against creditors resulting from divorces, bankruptcy, and most importantly, lawsuits.

No group has been more responsive to this new hybrid of legal benefits as the medical community. The National Training Conference, which sponsors over 300 seminars every year, reports having over 10,000 doctors attend their seminars on asset protection in the past three years alone.

Family Limited Partnerships (FLPs) have been tax-planning tools of the wealthy and informed since 1916, when Congress first created them. With the volume of case law substantiating this entity, the FLP has emerged as a tremendously powerful choice for lawsuit-prone professionals to protect family homes and other assets while reducing taxes at the same time.

The FLP remains "the diamond among the gems of advanced tax planning," says Robert Dowd, a Dallas attorney who travels the country teaching tax planning and asset protection to doctors. He says that one guiding principle of an FLP is that children are generally taxed at a much lower rate than their parents.

A properly drafted FLP will allow its owners to legally gift or spread their assets to their children and, therefore, their tax brackets to avoid income and estate taxes while remaining in control of the family wealth. With this ability, today's FLPs can reduce two major taxes: income taxes and estate tax. If parents' income is distributed to their children's tax brackets, income taxes can be drastically reduced. Also, if the value of the parents' estate is diffused among their children, estate taxes can be reduced to zero. Very few legal tools allow such liberal income spreading provisions for tax reduction.

Nowadays there is a difference between a "plain vanilla" FLP drafted for tax reduction purposes and a specialized asset protection version of an FLP. An asset protection FLP that is carefully drafted will prevent assets owned by the partnership from being seized by creditors (or plaintiffs) to collect on their judgment.