Ownership by Children
A transfer of ownership of the limited partnership interests to a child or children may provide one good solution. A lawsuit against Husband and Wife would not impact the partnership interests because ownership is no longer in the name of Husband and Wife. Although Husband and Wife may retain management powers, directly or indirectly, over the assets as general partner, there are no limited partnership interests available for the plaintiff. Husband and Wife have effectively protected assets by gifting the limited partnership interests to their children.
The disadvantage is that a direct gift to the children in this form may create gift tax liability, depending upon the amount involved. Further, the children have legal rights as limited partners, which must be respected. The gift to the children is real under this arrangement, so assets in the FLP must be those which Husband and Wife are willing to part with, a matter which requires serious consideration and planning. Those in a position to make an irrevocable transfer to their children may accomplish good asset protection and possibly advantageous estate tax savings with this strategy.