The FLP – Family Limited Partnership
As a domestic asset protection service, the Family Limited Partnership can provide a strong layer of protection between your assets and creditors. By having a properly established FLP, pursuing the assets in the entity is difficult. Even in the event of a judgment there is an additional court ruling that must take place in order to attempt to receive distributions of profit from the partnership. If that takes place, however, the creditor will be required to pay taxes on profits of the partnership, whether he/she receives money, or not, as you will read below. This is a very strong deterrent for a legal opponent, its called a charging order.
FLP Case Law
Case law history proves that a family limited partnership is one of many effective asset protection tools in use today. It can help reduce estate and income taxes, it gives you the ability to manage your assets while denying creditors access to them and has a built in tax penalty for any creditor who receives a charging order against it, providing a substantial deterrent.
FLP Asset Protection
General partners are in complete control while limited partners have little to no control. The law denies creditors the right to take any interest in the partnership, and if structured properly they can provide great anonymity. Family Limited Partnerships are among the most widely used and effective domestic asset protection tools.
FLP’s are also used to save thousands of dollars in income tax every year, save self-employment taxes, save hundreds of thousands in future estate taxes, insulate your assets from lawsuits and retain control over your assets.
FLP’s are used to protect real estate, stocks & bonds, cash, jewelry, furniture and fixtures and many other personal and business assets. This is exceptional in that it is a tax neutral entity. Thus, unlike a corporation, you can freely transfer assets in and out of the Family Limited Partnership without concern about an adverse tax effect.
Establishing an FLP
First, we legally and properly form your FLP that is structured to your needs. This takes important planning. Second, the partnership agreement has to be drawn up and the ownership decided. Third, the assets have to be properly transferred into your entity.
Once all of this has been done, it becomes very hard for a creditor to pursue the assets that are protected in your FLP.
How an FLP Works
In the event of a judgment, a creditor must then pursue a charging order against the partnership. That grants the creditor the debtor’s share of the distributions from the FLP. However, if no distributions are made, the creditor gets nothing. The managing partners remain in control of distributions to the partners. If the partnership has undistributed profits, the creditor receives a K-1 tax form and must pay tax to the IRS on money that was never received, and probably never will receive. As a result of this, few creditors ever go for a charging order.
Your partnership agreement is confidential and is not filed with any government agency. Typically, only you know what it says and only you know who the limited partners are and what assets are owned by the partnership.