Family Partnership – Asset Protection Planning Tool
By Robert J. Mintz J.D. LL.M
A Family Partnership is a sophisticated financial planning tool which accomplishes a variety of valuable business, asset protection and estate planning goals.
The Role of General and Limited Partners
The Family Partnership is usually formed as a Limited Partnership and that’s why it is also known as a Family Limited Partnership. By law it has two types of members, general partners and limited partners. The general partners are responsible for managing the partnership’s administrative and business affairs and have full liability for all obligations and debts of the partnership. Limited partners are mere passive owners. They can be permitted a vote on substantive partnership matters but are not permitted to engage in active management. In exchange for their limited role in management, limited partners do not have personal liability for the debts of the partnership. A limited partner may lose any amount of capital contributed but cannot be forced to contribute any additional amounts unless the partnership agreement provides for additional contributions. The personal assets of the limited partner are not at risk for partnership liabilities.
Management and Control
Family Partnerships are useful financial planning strategies for holding family assets within a unified structure. Accumulated savings and investments are often held in a family partnership for efficiency and ease of management. Parents often wish to bring in adult children to learn about and participate in family business decisions and the Family Partnership is a convenient format for this.
Also important is the ability to transfer partial ownership interests to children or younger family member without a loss of management control over those assets. When limited partnership interests in a Family Partnership are transferred to children, wealth is shifted within the family without a change in management.
A shift in wealth, without transferring management or control of assets is often the most important benefit of the Family Partnership. By transferring limited partnership interests to other family members, income for tax purposes can be shifted to lower bracket taxpayers. With the increase in marginal rates for relatively high earners, the ability to shift income to lower bracket taxpayers can result in substantial tax savings. Those who may have an estate with a value in excess of the effective estate tax exemption, often use the Family Partnership to reduce the value of their taxable estate. Since limited partnership interests are typically discounted in value because the recipient has no right to management or control, this strategy is one of the most popular and effective estate planning techniques.
The Family Partnership can also be effective in protecting assets from lawsuit liability. The law provides that property within the partnership cannot be seized by a creditor for the debts of a partner. In many states, the remedy of a creditor is limited to a charging order against the interest of the debtor partner. That means that the creditor is not permitted to collect against partnership assets, but instead is limited to whatever distributions are made by the Family Partnership to the debtor partner.
We have discussed the asset protection advantages and the tax and estate planning benefits in substantial detail at Family Limited Partnership: Overview and additionally in the book “Asset Protection for Physicians and High-Risk Business Owners” which is available for free download.