The Family Limited Partnership can be an outstanding device for providing lawsuit protection for family wealth. However, it cannot be used by itself as a stand-alone asset protection plan. Meaning, if what you have for your asset protection is simply a Family Limited Partnership, it provides no better protection of assets than a living trust, which is generally no asset protection at all. The FLP can be a valuable component of an asset protection plan when used as part of a properly designed overall strategy. In the sections that follow, we will show you how the FLP is typically used (and misused) and what it really can accomplish for both asset protection and tax savings when a sound and correct legal structure is utilized.
Under the typical arrangement, the FLP is set up so that Husband and/or Wife (or a specially formed Limited Liability Company) is each a general partner. Corporations are not typically used as a general partner if asset protection is a goal. The shares of a corporation can be seized by a creditor, which then effectively transfers to the creditor all management rights over the partnership. This would be a disastrous result in most situations.
The general partners might, for example, own only a minimal 1 or 2 percent interest in the partnership. The remaining interests are in the form of limited partnership interests. These interests will be held, directly or indirectly, by one or more other entities or family members, based on the particular tax, estate planning, and asset protection goals to be achieved.
After setting up the FLP, selected family assets are transferred into it. These may include investment accounts and shares in other business interests. When the transfers are complete, Husband and Wife no longer own a direct interest in these assets. Instead, they own, directly or indirectly, a controlling interest in the FLP, and it is the FLP that owns the assets. The general partners have management over the affairs of the partnership and can buy or sell any assets they wish, subject to the terms of the partnership agreement. The general partners also may have the right to determine what portion of partnership income and assets are retained by the partnership and what amount is to be distributed to the partners.