The Family Limited Partnership (FLP) is probably the most beneficial structure available for wealth preservation via asset protection, estate planning and tax minimization. Although you “can’t take it with you,” by placing your assets into FLPs you can legally and successfully protect everything you own from attack by creditors and from erosion by exorbitant taxes.
In order to illustrate the efficacy of Family Limited Partnerships from an asset protection, estate planning and tax minimization point of view, consider the case of “Dr. Franklin,” a fictitious character derived from actual client situations. [Although, for illustration purposes, we have created a hypothetical physician, the principles discussed herein apply equally to all professionals and, indeed, to all individuals who have accumulated significant wealth.]
Dr. Franklin is a successful physician in San Diego, California. He is approximately 50 years old, is married with three teen-aged children, and is chief of surgery at a major hospital. Dr. Franklin’ estate is worth approximately five million dollars.
In addition to his surgery practice, Dr. Franklin owns his home, as well as several investment properties including an apartment building and a shopping center. Dr. Franklin also sits on the board of directors of his hospital and his country club.
Dr. Franklin wanted to establish a wealth preservation strategy for three specific reasons:
- Dr. Franklin was very concerned by the proliferation of medical malpractice lawsuits and wanted to protect his significant assets in the event that he was sued by a patient. In addition, Dr. Franklin knew that as a landlord, he was prone to litigation from tenants and other persons who might be injured on one of his properties. He was sensitive to the fact that as a physician and a property owner, he was perceived as a “deep pocket target” by aggressive negligence lawyers.
- Dr. Franklin wanted to reduce his estate tax liability so that upon his and his wife’s deaths, their children would inherit as much as legally possible, with as little as possible (or nothing) paid to the I.R.S. in the form of inheritance taxes.
- Dr. Franklin hoped to minimize his current income tax liability on the income received from his rental properties.
FIRST GOAL: ASSET PROTECTION
Asset protection is defined as the safeguarding of personal wealth from attack by future creditors. “Assets” are broadly defined and include homes, cars, boats, jewelry, business interests, cash, bank accounts, brokerage accounts, stocks, bonds, art and other collections, real estate, etc.
“Creditors” are also broadly defined and include actual creditors as well as identifiable probable creditors, such as litigants, soon-to-be ex-spouses, disgruntled business partners, or anyone who you know that has a claim against you, even if they do not yet know it. Creditors may even include government agencies, such as the I.R.S.
The effectiveness of an FLP in providing asset protection is statutory, meaning that it has been codified as law. The Revised Uniform Limited Partnership Act (RULPA), which has been adopted in all fifty states, provides that the assets owned by a limited partnership are not owned by the individual partners.
Therefore, those assets cannot be attached by the personal creditors of a partner. If a person contributes assets to an FLP, those assets are no longer owned by that person (although, as explained below, the person may still control those assets), and creditors of that person may not attach those assets merely because they have a judgment against a partner of the FLP.
THE ESSENCE OF ASSET PROTECTION PLANNING: CONTROL EVERYTHING BUT OWN NOTHING
A family limited partnership is, by definition, a joint venture between family members. The partnership is comprised of both general and limited partners. Dr. and Mrs. Franklin are each the general partners. [Because Mrs. Franklin is not a licensed physician, Dr. Franklin is the sole general partner o