How to Maximize Family Limited Partnership Protection

Use these strategies to reinforce the protective characteristics of limited partnerships:

1. A limited partnership agreement should provide the general partners full discretion to withhold distributions of profits for purposes of future investment.
2. An agreement should specifically restrict the transfer of an LP interest without the consent of the general partner and/or a majority of the limited partners.
3. The agreement should prevent a limited partner from withdrawing capital contributions without unanimous partner consent.
4. The agreement should clearly specify that a creditor of a limited partner becomes only an assignee of the limited partner's interest and acquires no partnership rights other than the right to distributions.
5. The agreement should allow (at the general partner's sole discretion) a transfer of a limited partner's voting rights to ensure that a creditor that successfully obtains a charging order also becomes fully liable to pay the debtor's share of taxes from partnership profits.
6. The general partner should be able to assess the limited partners for further contributions and to extend the obligation to any creditor holding a charging order.
7. The agreement should stipulate that failure to meet any future contribution requirements would cause a partner to forfeit their partnership interest without entitling them to any return of capital they had contributed to the partnership.
8. High-risk family members should own a smaller partnership interest; however it should be proportional to the asset contributions to avoid any future gift tax consequences or claims of fraudulent conveyance.
9. An agreement should provide low-risk family member a disproportionately higher share of the profits.
10. Limited partners should be able to grant an option-to-purchase their partnership interest back to the limited partnership. This can be an effective way to divert partnership interests, provided that the provision is adopted prior to any creditor claim.
11. Spouses should hold their limited partnership interests as tenants-by-the-entirety in states where this type of tenancy is recognized to protect interests against a creditor of one spouse.

A family limited partnership should be used for titling when investing in a large, non-controlled limited partnership or in a LLC to protect the distributions that may otherwise be exposed to a creditor or lawsuit.

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