What is a family limited partnership?
A Family Limited Partnership (FLP) is a wealth transfer strategy where parents serve as General Partners with their children as Limited Partners. For years, the FLP (also called a FLiP) was the preferred manner to transfer wealth from parents to a younger generation.
The parents transfer assets into the FLP and continue to manage them during their lives. Over time, they transfer a percentage of the ownership to their children.
How FLPs reduce transfer taxes
The advantage of an FLP is that due to the ownership arrangement, when the asset (such as land) is appraised, the value is substantially decreased due to decreased marketability. 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.
Unless the parents are willing to pay the gift tax, they'll want to transfer the property over a period of years. By discounting the value of the property through an FLP, the transfer can happen much more quickly.
The drawback of FLPs
The drawback of the FLP 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.
What is an asset protection LLC?
An Asset Protection LLC solves the liability problem. When property is transferred into a Nevada LLC, it is immediately protected from creditors thanks to Nevada's charging order protection.
In short, 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.
How LLC ownership transfers work
The LLC ownership interests are transferred in the same manner as the FLP. 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.
Related asset protection strategies
Learn about other tools that may complement or serve as alternatives to FLPs and LLCs:
- Nevada Asset Protection Trust (NAPT) - Self-settled trust with Nevada's superior protections
- SPA Trust (Special Power of Appointment) - Alternative for non-Nevada residents
- Irrevocable Life Insurance Trust - Protect life insurance proceeds
- Asset Protection Overview - Compare all available strategies