The Peninsula Center for Estate and Lifelong Planning
Williamsburg Estate, Probate, Trust, and Business Attorneys

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Helena S. Mock, Esq.

Estate Planning is a complex area of the law because
it deals with so many different issues, from asset protection to taxation and
almost everything in between. There are a variety of different legal strategies
and tools that have been developed and are regularly used to assist in reducing
the value of an estate for estate tax purposes while maintaining control and keeping
the assets in the family. 

One of these strategies is the use of the Family
Limited Partnership (“FLP”) or Family Limited Liability Company (“FLLC”).  With this strategy, a property owner can give
away the underlying equity interest in an asset while still retaining
managerial control over that asset.  FLPs
are most commonly used as vehicles for making gifts of interests in real estate
and family-owned business interests. 
With an FLP, you title assets in the name of the FLP and then gift partnership
interests in the FLP to others. It is like giving away pieces of a pie.
However, because each piece is valued individually, the sum of the parts does
not necessarily equal the whole. The fractional ownership of property by
multiple individuals allows for the artificial “discounting” of the value of
each individual’s share upon their deaths, thereby reducing estate taxes. 

But why are discounts for these interests
Very simply, it’s because no buyer would
pay full price for a fractional interest in a closely-held FLP since profits
are shared with the other partners, and the buyer may not have control over how
the FLP is managed or when it will be dissolved or the assets sold.  The overall value of the property is only
artificially diluted by this process, however, because at any time, the partners
can agree to dissolve the FLP, and upon termination of the partnership, the
assets almost magically return to their full underlying value.

This can also be a way of giving interests in
property to beneficiaries who may not yet have the ability to manage assets
wisely.  Since the FLP allows for
centralized management, the individual owners of the separate interests have
little to no say in management, development, or sale of partnership property. It
is also more difficult for creditors to get at the assets when they are in the
FLP than if they were held outright by the beneficiaries. In fact, many experts
believe this one document has more important lawsuit and asset protection
features than any other estate planning strategy. It can be the fortress
protecting your hard-earned wealth.

The result of this strategy is that the family’s
assets have greater protection from a personal judgment against any family
member. If the limited partnership had not been used, all the family’s assets,
including the business or property in the FLP, would have been lost. The laws
protecting partnership assets from the reach of creditors of individual
partners have been around for many years. In fact, these provisions date back
to the English Partnership Act of 1890 and were later adopted by the Uniform
Partnership Act which has been the law in America since the 1940s.

There is always the possibility that a judge may
not like the fact that a legitimate creditor can’t get paid because of the
partnership rules and may take it upon himself to find a way to satisfy the
judgment. Perhaps in close cases, a judge may rule that the partnership was set
up to defraud creditors and thereby ignore the protection. Or the legislature
may decide to change the law.  Several
years ago, the IRS cracked down on this strategy; however, more recent cases
have upheld FLPs as a viable estate planning strategy when they are properly
structured and administered.

While FLPs and other advanced planning strategies
may not be for everyone, they can be a good tool to minimize estate taxation
and maximize asset protection. However, you should seek the advice of an
experienced estate planning attorney in determining whether an FLP is
appropriate for you and for assistance in setting up and administering the FLP.