Asset protection is important for some professionals, business people, and investors. A family limited partnership (FLP) can be the ideal solution, and we will provide the details here.
Basic Structure
There is nothing deceiving about the name of this asset protection structure. The members of an FLP must all be in the same family.
If you establish a family limited partnership, you would be the general partner, and the family members that you include would be limited partners.
You do not have to worry about whipping any votes before you can take actions, because the general partner has sole decision-making authority.
Control Everything From a Legal Distance
The ultimate goal of asset protection is to maintain control of the resources without directly owning them. A family limited partnership gives you the ability to strike this ideal balance.
To explain the way that someone could use family limited partnerships to great advantage, we will provide a simple example. Jennifer is a pediatrician, and she invests in rental properties to earn additional income. She has three apartment buildings and a shopping center.
Injuries can occur on these properties, and she would be viewed as a deep pocket target by personal injury attorneys. She has to take steps to protect her assets, so she puts each rental property into a separate family limited partnership.
If someone is injured in the shopping center, the litigant would sue the family limited partnership that owns that property. Their attorney would soon find out that a bank holds the mortgage, and the other investment properties would be protected.
She conveys her bank and brokerage accounts into a family limited partnership for low risk assets, and her home is tucked away in another family limited partnership. As a result, if she is personally targeted, her assets would be protected.
With regard to her medical practice, it has been registered as a professional corporation, and all of the stock is owned by a dedicated family limited partnership. If she is sued, she could stop taking a salary and the corporation could distribute earnings and management fees to the FLP.
The assets in all of these family limited partnerships would be protected if another partner is personally sued, so there is asset protection in all directions.
Estate Tax Efficiency
The federal estate tax is a source of concern for people that have been very successful from a financial perspective, because it carries a 40 percent top rate. It is only a factor for high net worth individuals because you can use the exclusion to transfer a certain amount tax-free.
Over the last few years, the exclusion has reached record highs, and it stands at $11.7 million in 2021.
There is also a federal gift tax that is unified with the estate tax, so the $11.7 million exclusion is a unified exclusion. It applies to your estate and large gifts that you give during your life.
Family limited partnerships are used by wealthy families to gain estate tax efficiency. One advantage is the fact that the IRS values the shares at a discount because they couldn’t be traded at full value on the open market.
In addition to the unified lifetime exclusion, there is also an annual gift tax exclusion. You can give as much is $15,000 to unlimited people every year free of taxation. This exclusion can be used to distribute shares in family limited partnerships.
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