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Family Partnerships

A Family Partnership is a popular financial strategy for shifting ownership of assets to children or other family members without sacrificing management or control over the assets. The unique features of the Family Partnership are often used to reduce overall family income taxes, minimize or eliminate estate taxes and provide asset protection from lawsuit liability claims.

 Family Partnership Management and Control

The Family Partnership is also known as a Family Limited Partnership and typically operates in this manner: Some portion of family savings and investments are transferred by parents into a Family Partnership- a specially designed limited partnership legal entity.  The parents (or an LLC) may serve as the general partners, owning a specified percentage of the Family Partnership interests. The parents can also own some or all of the limited partnership interests, depending on what the goals are and what is to be accomplished. The general partner is responsible for management of the partnership and it’s assets. Limited partners are not permitted to participate in management, except for limited voting rights on matters specified in the Family Partnership Agreement.

Holding assets within a Family Partnership allows value to be fractionalized and shifted among family members in this manner. Ownership of particular assets remain intact within the Family Partnership while management and control of the assets are maintained by the general partners. By transferring limited partnership interests to children, asset values can be shifted from parents to children to achieve important tax and asset protection benefits.

 Tax Savings

For example, roughly stated, the 2013 income tax laws increase federal taxes on investment income as well as increasing the top marginal tax rates to 39.6%. Combined federal and state income taxes and the new tax imposed by the Affordable Care Act can significantly increase overall tax liability for certain families. If investment or business income can be shifted to lower bracket family members by transferring interests in a Family Partnership, overall tax savings may be achieved.  Shifting ownership in this manner may also reduce the parents estate for estate tax purposes. Depending in the value of the estate, taxes may be reduced or avoided.

Asset Protection

A Family Partnership may also play an important role in protecting assets from lawsuit liability claims. Assets within the Family Partnership cannot be legally seized by a judgment creditor of a partner.  Instead, the law provides that the creditor’s remedy is limited to a charging order- a right only to partnership distributions to the debtor, when, if ever, such distributions are made.

We have included a very detailed discussions of the law concerning Family Partnerships, tax treatment and asset protection issues in the Asset Protection Law Library on this website.

 

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