These business entities have been around for quite a while. They are predominately used in the estate planning process by wealthy individuals to transfer wealth to other members of their families with the goal of avoiding a large estate tax burden.

The wealthy person establishes a family limited partnership and transfers his assets to the limited partnership. He also makes gifts of limited partnership interests to his children. The limited partnership interests of his children usually have transfer restrictions on them and represent a minority interest in the limited partnership which allows the person making the gifts to discount their value and pay less gift tax.

The wealthy individual still maintains control over these assets in the limited partnership but has been able to transfer them to his children thereby removing these assets from his estate for estate tax purposes.

Currently, the Internal Revenue Service has had some success in challenging the validity of limited partnerships in an estate planning context. However, using family limited partnerships for asset protection is another story.

As an asset protection tool, family limited partnerships are very helpful. A family limited partnership is established to hold family assets and family business interests. As such, a person desiring to sue the wealthy family member may proceed against the individual’s family limited partnership interest. However this frequently does not occur, as the person suing is only entitled to a charging order against the limited partnership interest.

That entitles the successful litigant to an order that states that the litigant is entitled to collect any distributions that would have been made to that partner. If no distributions are made to that partner, the litigant collects nothing. To make matters worse, the successful litigant must pay income tax on the value of the charging order even though no income is actually received. With this lose, lose situation, it is easy to see how this asset protection strategy man help discourage law suits.

Return to: Summary of Asset Protection Methods  - at Ourednik law offices in Jacksonville Beach, Florida.

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