A Family Partnership is a popular for estate planning and as a financial strategy for shifting ownership of assets to children or other family members without sacrificing management or control over the assets. The unique features of the Family Partnership are often used to reduce overall family income taxes, minimize or eliminate estate taxes and provide asset protection from lawsuit liability claims.
Family Partnership Management and Control
The Family Partnership is also known as a Family Limited Partnership and typically operates in this manner: Some portion of family savings and investments are transferred by parents into a Family Partnership- a specially designed limited partnership legal entity. The parents (or an LLC) may serve as the general partners, owning a specified percentage of the Family Partnership interests. The parents can also own some or all of the limited partnership interests, depending on what the goals are and what is to be accomplished. The general partner is responsible for management of the partnership and it’s assets. Limited partners are not permitted to participate in management, except for limited voting rights on matters specified in the Family Partnership Agreement.
Holding assets within a Family Partnership allows value to be fractionalized and shifted among family members in this manner. Ownership of particular assets remain intact within the Family Partnership while management and control of the assets are maintained by the general partners. By transferring limited partnership interests to children, asset values can be shifted from parents to children to achieve important tax and asset protection benefits.
For example, roughly stated, the 2013 income tax laws increase federal taxes on investment income as well as increasing the top marginal tax rates to 39.6%. Combined federal and state income taxes and the new tax imposed by the Affordable Care Act can significantly increase overall tax liability for certain families. If investment or business income can be shifted to lower bracket family members by transferring interests in a Family Partnership, overall tax savings may be achieved. Shifting ownership in this manner may also reduce the parents estate for estate tax purposes. Depending in the value of the estate, taxes may be reduced or avoided.
A Family Partnership may also play an important role in protecting assets from lawsuit liability claims. Assets within the Family Partnership cannot be legally seized by a judgment creditor of a partner. Instead, the law provides that the creditor’s remedy is limited to a charging order- a right only to partnership distributions to the debtor, when, if ever, such distributions are made.
EXAMPLE OF OFFSHORE LLC
A popular strategy is to form a Family Limited Partnership to hold your savings and brokerage accounts. The limited partnership interests in the FLP will be held by the Offshore LLC. We will protect the ownership of the Offshore LLC by holding membership interests in the Family Savings Trust.
Under this arrangement, savings and brokerage accounts are well insulated in the FLP. But we opened up new tactics and levels of protection with the Offshore LLC.
To combat a perceived threat, or to take advantage of investment opportunities, at any point in the future, assets of the FLP can be moved into an overseas account in the name of the Offshore LLC. If there is a subsequent judgment against you, even a charging order is unlikely since you do not own interests in the FLP or Offshore LLC. Any collection order would be without enforcement capabilities in the U.S.
If litigated in the jurisdiction where the Offshore LLC is formed, it is likely that the plaintiff would have to prove that any transfers were a violation of the applicable fraudulent transfer laws and such a claim would have to be initiated within the Statute of Limitations period (generally one or two years). The obstacles presented by this arrangement, and other features which can be added, provide an excellent legal shield against even the most aggressive and determined plaintiffs.
The Offshore LLC is an effective and flexible asset protection tool. It reinforces the available domestic protection for those with significant liability exposure. Tax filings and returns are minimized, and administration and offshore money management issues only arise at the time, if ever, that the Offshore LLC is funded with bank or brokerage accounts.
Free Initial Consultation with a Family Partnership Lawyer
When you need business and estate help, call Ascent Law for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506