An important goal of estate planning is to protect income and assets from creditors’ claims and tax collection. While many people think asset protection involves dishonest techniques, there are many ways to protect personal property, real estate and other assets. In addition to federal and state laws that exempt certain types of property from creditors’ claims, there are numerous estate planning tools that may be able to shield assets from future creditors and reduce or eliminate estate or income taxation. One such tool is the family limited partnership ("FLP").
Family Limited Partnerships and Asset Protection.
An FLP is a valuable asset protection strategy for a family whose members want to preserve their assets while retaining control over them. An FLP is a specially designed limited partnership, consisting of one or more general partners who are responsible for managing partnership affairs. The other partners are called limited partners, and they are not permitted to participate in any management decisions and generally have no vote and have limited rights.
Because interests in FLPs are generally not marketable (that is, interests in FLPs cannot be converted easily to cash at a known market price), a discount for lack of marketability is typically appropriate. Such a discount significantly reduces an FLP's value for estate tax purposes. A minority discount may also be available to reduce the valuation of an FLP interest given to a limited partner who has a noncontrolling interest in the FLP.
Annual Gift Tax Exclusion and Gift Tax Exemption.
FLPs are often designed to reduce estate and gift taxes by taking advantage of valuation discounts while making gifts utilizing one's annual gift tax exclusion of $12,000 and the gift tax exemption of $1,000,000.
Once an FLP has been established and property is transferred thereto, limited partnership interests may be given to on family by means of an annual program taking advantage of the $12,000 annual gift tax exclusion. Larger blocks of limited partnership interests, taking advantage of the gift tax exemption, may also be made without incurring gift tax.
Shielding Assets from Creditors.
An FLP provides a substantial measure of protection against creditors. By using such an entity, the family assets will be titled away from one's family, although they are given ownership in the family assets. Without the partnership, a transfer to a child could involve giving title to the child, exposing the title to creditors, spouses, and taxing authorities. The transfer of limited partnership interests passes no control, and any claims by creditors, spouses, or taxing authorities against a child may only be asserted against the limited partnership interests without the ability to reach the property itself.
Absent a fraudulent conveyance, a Florida judgment creditor cannot reach the assets inside the partnership and cannot attach the partnership interest. A creditor is limited to obtaining a charging lien. This means that the creditor would be entitled to distributions only when the FLP actually declares distributions.
If no distributions were made, then the creditor would receive nothing. Additionally, the IRS has ruled that a creditor with a charging lien on a partnership interest must recognize a pro rate share of the partnership's income, whether or not it is distributed. Accordingly, creditors rarely assert charging liens against partnership interests or will settle their claims at a substantial discount.
Taking steps to protect your assets from creditors’ claims, the availability of valuation discounts to reduce the estate or gift tax value of an FLP, and strategic use of the annual gift tax exclusion and gift tax exemption can result in significant preservation of your assets.
Joshua T. Keleske, P. A. proudly serves families in the Tampa Bay area with their estate planning, estate and trust administration, and business planning needs. If you have questions regarding how we can be of assistance to you and your family, please contact us at anytime at 813-254-0044. We are happy to answer your questions and arrange for an appointment to speak with you.
Please also visit http://www.trustedcounselors.com to learn more about Joshua T. Keleske, P. A.