A family limited partnership protects assets by prohibiting transfers of ownership without the consent of all other partners. Consequently, a creditor’s only recourse is a charging order against a debtor’s percentage ownership in the partnership; and, unless it is proven that the partnership was created to defraud creditors, the creditor may not force distributions nor liquidate the partnership. Creditors are reluctant to obtain a charging order because, as they are entitled to a partner’s share of partnership income, they are also liable for the partner’s share of income tax. If no distributions of partnership income are made to the partners, the creditor is left only with phantom income, for which, tax liability will be imposed. In sum, assets placed in a family limited partnership are “poisoned” as far as creditors are concerned.
Another important advantage of the family limited partnership relates to the way in which partnership interests are devalued for estate tax purposes. In devaluing partnership interests, numerous factors are taken into consideration, including restrictions on: ownership, transfer, and liquidation rights. An partnership consisting of real estate and closely held business interests may be devalued as much as 50%. A 35% devaluation, however, is more typical.
When a client’s estate is made up of significant real estate holdings and securities, the client is often advised to create two family limited partnerships. This follows because of the liability exposure inherent in the ownership of real estate. For example, if there were environmental problems with the land or someone was injured on the land, the owner of the land could be responsible. The family limited partnership will insulate other assets from being infected by the liability exposure of the real estate so long as the only asset held by the family limited partnership is the real estate holding. Conversely, because securities are so liquid, it is necessary to protect them from assets that could give rise to liabilities. This is also done by insulating them using the family limited partnership.
|
