Family Limited Partnership

Watch this video with attorney Douglass Lodmell explaining FLPs:

The Family Limited Partnership is one of the most important Asset Protection tools in use today. Effectively drafted and funded it can act as a significant hurdle to a creditor seeking to attach your wealth. However, it is also one of the most misunderstood vehicles as well. A quick search on the net will reveal much confusing and often conflicting information. The FLP is also often mistakenly referred to as the Family Trust or Family Limited Trust. Understanding how, why and when an FLP will work for you as an Asset Protection vehicle is critical.

What are Family Limited Partnerships?

An Family Limited Partnership (FLP) is a legal entity known as a Limited Partnership. While the Limited Partnership has been around for over 100 years, they became popular in the 1980’s when many real estate developers and investors began using this structure to assemble groups of unrelated investors. The primary defining feature of a Limited Partnership is the distinction between the 2 classes of partner, the General Partner (GP) and the Limited Partner (LP). It is this distinction that makes the LP so useful in business applications in which some partners will be managers and others will only be investors.

In the LP structure the GP interest is also the management interest. The GP is 100% responsible for the management of the partnership assets and there is no input whatsoever required, or for that matter even allowed, by the Limited Partners. The GP in most cases is also responsible for any liabilities of the partnership.

The Limited Partners, on the other hand, are in the reverse position. They have no management responsibility and in fact are not permitted to. They have no say whatsoever in the operation of the partnership and do not have any control over the amount or timing of any distributions of partnership income or assets. They are much more like beneficiaries of a discretionary trust than shareholders of a corporation. However, other than the investment itself, they also have no liability or risk associated with the partnership. They are completely insulated from the acts of the partnership and the General Partner. It is for this reason that this structure is so popular with investment groups.

Family Limited Partnerships Explained

The “F” designation simply stands for Family, hence a “Family Limited Partnership.” All Limited Partnerships are governed under the statutes of the state in which they were created. While these State laws are for the most part similar, there are some important differences when it comes to creditor protection. For example in Arizona and Nevada there is greater protection in the form of a “Charging Order” which is statutorily the exclusive remedy to creditors as opposed to states like California, New York or Florida, where judicial discretion remains.

An LP will also have its own tax ID and file a 1065 federal partnership tax return, and are most commonly treated as pass-through entity for tax purposes. This means no double tax, as all income is accounted for via a K-1 on the individual partners return. The FLP is a popular and common business and estate-planning tool, and over the past 20 years has become a mainstay of Asset Protection as well. But how does it work, and does it really protect your assets? Read some of our other related articles for more.