For years, the Family Limited Partnership or FLiP was the preferred manner to transfer wealth from parents to a younger generation. The arrangement involves the parents serving as General Partners with their children as Limited Partners. The parents transfer assets into the FLiP and continue to manage them during their lives. Over time, they transfer a percentage of the ownership of that asset. The advantage is that due to the ownership arrangement, when the asset, such as land, is appraised, the value was substantially decreased due to the decreased marketability of that property. This is based on the idea that if you were interested in purchasing a plot of land, your offer would be lower if you were only entitled to a portion of that land. Your offer would be even lower if you were contractually prevented from selling, building or otherwise enjoying full ownership privileges of the property. That is the idea behind the FLiP arrangement. Unless the parents are willing to pay the gift tax, the parents are going to want to transfer the property over a period of years to avoid paying a gift tax. By discounting the value of the property through a FLiP, the transfer can happen much more quickly. The drawback of the FLiP is that the General Partners are subject to unlimited liability. Moreover, until the asset transfer is complete, the percentage of property that has not yet been transferred is still subject to creditors.
An Asset Protection LLC solves that problem. When property is transferred into a Nevada LLC, it is immediately protected from creditors thanks to Nevada’s charging order protection. In short, that means that a creditor is only entitled to distributions made from the LLC to the owner. If the LLC does not make distributions, the creditor is entitled to nothing. The creditor has no claim on the ownership interest itself and cannot force a sale.
The LLC ownership interests are transferred in the same manner as the FLiP. The parents, serving as managers and owners, transfer ownership interests to their children. As managers, only they have authority to sell or otherwise control the property. Upon their deaths, the children, having received 100% of the property, elect managers among themselves or follow the succession plan dictated by the parents in the agreement of the LLC. As long as the property stays in the LLC, each owner enjoys the creditor protection of the LLC form.