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Limited Liability Companies
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Irrevocable & Revocable Trusts
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Family Limited Partnership Structuring

Families frequently set up limited partnerships in which parents form the partnership and contribute various income-producing or business assets in exchange for their respective partnership interests. The parents typically receive a small interest in the partnership as the general partners and then equally control the partnership because they previously controlled the contributed assets. Parents may also receive, as limited partners, the remaining majority interest in the limited partnership (general and limited partners can be the same parties, and both can own an interest in a limited partnership). As a result, the parents have exclusive, equal ownership and control of the partnership and its assets in a similar way that they controlled their assets titled in their personal names—but the assets are now fully protected from creditors in the LP entity.

Family partnerships can be structured a number of different ways. If one parent has creditors, the other can become the general partner. Or, both parents could form a corporation or a LLC (preferred) to be the general partner in the partnership. The LLC is an excellent choice because a general partnership that incurred liabilities would subject the general partners for those amounts. LP interests can be gradually gifted to children, a living trust or some other entity (which may also be the limited partner). Because of the highly flexible limited partnership structure, it is ideally suited for estate planning and a systematic gifting program.

An extremely attractive tax feature of the FLP is the ability to distribute a tax burden between partners any way that they choose. For instance, a general partner father in a high tax bracket could contribute large amounts of money to a partnership while retaining only a small interest but still retain full control. The tax burden for this contribution would be spread across the limited partners (in this case, the children with a lower tax rate) who own a majority interest in the partnership. The process of combining trusts with limited partnerships creates a powerful family Asset Protection device. It should be noted that combining a trust with a limited partnership is better than using either entity independently.

Combining a family limited partnership with a living trust can provide a high-integrity estate plan. The partnership (as owner of the family assets) provides protection and discounted valuations for estate tax purposes. The limited partnership interests owned by the partners' respective living trusts allows the partners to bequeath their partnership interest while avoiding probate. When structuring this type of arrangement between spouses who own the partnership it is anticipated that they will take advantage of the unlimited marital deduction. Upon death of the grantor the family trust becomes irrevocable and is succeeded by two internal trusts, a credit-equivalent bypass trust and a marital trust. Using a strategy like this transfers the estate tax liability to the surviving spouse's estate and defers estate taxes. Traditional probate complexities and costs are avoided when the partnership interests are owned by living trusts and delays in concluding probate are avoided. Most importantly, creditors need not be notified, allowing disposition of assets quickly, and efficiently.


The best defense is a good offense.