A family limited partnership is a marketing term used to describe limited partnerships. It is nothing more than a limited partnership where all the partners are family members. Consequently, a family limited partnership works in exactly the same way as any other limited partnership or limited liability company to protect your assets.

The Family Limited Partnership (FLP) is an excellent asset protection and estate planning vehicle. Here is how it works. The general partner (“GP”) manages and controls the FLP and must have unlimited liability. A U.S. corporation, wherein husband and wife are 100% shareholders, may act as the FLP’s GP to mitigate unlimited liability. The limited partners (“LP”) hold equity interests, but no decision-making authority over the partnership. The spouses then fund the FLP with a closely-held business or businesses. Initially, the spouses will hold 100% of the GP and LP interests.

After formation, the spouses may gift some or all LP interests to their children though an irrevocable children’s trust and perhaps to other family members, outright or in trust. Significantly, the value LP interests are discounted for gift tax purposes to reflect two principals. The first is that a LP is a non-controlling interest because the GPs manage and control the assets. The second is that there is no ready market for the sale and transfer of the LP interest and in fact, the partnership interest will restrict any sale or transfer. Thus, the spouses are able to transfer a significant amount of partnership assets at a significant discount, typically between 30% and 50%.

Significantly, a FLP provides a strong layer of protection between the limited partner’s interest and creditors. Even in the event of a judgment, the judgment creditor must obtain an additional court ruling called a charging order to attempt to receive profit distributions from the partnership. A charging order grants the creditor the debtor’s share of the distributions from the FLP. However, the GP remains in control of distributions to the partners. Thus, if the GP decides not to make distributions, the creditor gets nothing. Even so, if the partnership has undistributed profits, the creditor must pay tax on the FLP’s undistributed profits that were never received. This deters creditors from obtaining charging orders.

The result? Husband and wife reduce their estate taxes, with no loss of control over the underlying assets and obtain significant asset protection against potential creditors.

Lastly, if spouses are nonresident aliens of the United States, their gifts of LP interests to their U.S. resident children should be completely free of gift tax. The reason is that gifts of intangible assets by nonresident aliens are not subject to U.S. gift tax.

LLCs and limited partnerships are better than corporations because unlike corporations these entities protect their own assets from your lawsuits. For example, if you own assets through a corporation and you are sued, your creditor will be able to seize the stock of your corporation. Once the creditor seizes the stock of your corporation, they will be able to take the assets you hold in the corporation. Because interests in LLCs and limited partnerships are not subject to attachment, they cannot be seized by a creditor. Therefore, the assets you hold in these entities are protected.

It varies. We frequently use Delaware and Nevada. But we also frequently use California for our California clients, or Florida for our Florida clients. We also frequently form LLCs offshore. Depending on your assets, which states they are in, and other factors, we will help you determine which state is best for you.

Retirement plans present a significant planning opportunity for asset protection.

Qualified Plans: Qualified plans provide significant asset protection because they must include anti-alienation provisions mandated by ERISA and therefore are excluded from the debtor’s bankruptcy estate. Common ERISA plans include defined benefit plans (like a pension plan), defined contribution plans (like a profit sharing plan), and plans to which employees make voluntary contributions (401(k) plans).

However, to obtain ERISA protection, owner and non-owner employees must be covered under the plan to maximize the plan’s asset protection benefits. Sole proprietors are not protected under ERISA and must rely on nonqualified plans (discussed below).

ERISA protection applies to bankruptcy under the Bankruptcy Code 541(c)(2). Even outside of bankruptcy, there are only very limited exceptions where a creditor can reach the assets of an ERISA plan, including criminal conduct relating to an ERISA plan, traditional support obligations for spouse and children, and federal tax liens.

Perhaps the most telling evidence of ERISA’s protection is the Supreme Court’s decision in Guidry v. Sheetmetal Pension Fund. In Guidry, a union official embezzled money from the union and transferred it to his union pension plan. The union official was convicted of the crime of embezzlement and the union attempted to recover the embezzled proceeds from the pension plan. The Court held that the money in the pension plan could not be reached by creditors because of ERISA’s anti-alienation requirements. Prior to this case, various courts and states had carved out exceptions to ERISA’s anti-alienation provision. However, the Supreme Court declared that exceptions to the anti-alienation rules were not justified by ERISA. Thus, the protection afforded by ERISA’s anti-alienation provisions applied regardless of how distasteful the debtor’s behavior may have been or any applicable state public policy reasons (including a state’s fraudulent transfer laws).

In response to Guidry and other cases like Guidry, Congress carved out several exceptions to the protection afforded by ERISA. These exceptions include: (i) a criminal violation of ERISA; (ii) a judgment, order, decree, or settlement agreement in connection with a violation of the fiduciary provisions of ERISA; or (iii) a settlement between the Secretary of Labor and the participant or settlement agreement between the Pension Benefit Guaranty Corporation and the participant in connection with a violation of ERISA’s fiduciary duties. These exceptions obviously apply only to criminal conduct and only to conduct relating specifically to an ERISA plan. Consequently, Guidry and its progeny continue to provide full protection to ERISA plans.

Nonqualified plans are generally not protected by ERISA, but may be protected by state statutes that exempt retirement plans from creditor claims. The protection afforded by each state varies, based on the applicable statute and its interpretation by the courts.

For example, California protects “private retirement plans.” The California statute provides that private retirement plans are protected from creditors, both before and after distribution to the debtor, and defines private retirement plans to include: (i) private retirement plans; (ii) profit sharing plans; and (iii) IRAs and self-employed plans. Under California law, plan assets continue to be exempt even following the distribution from the plan. Similar to ERISA, an exception is carved out for child support obligations. California’s protection, although seemingly broad is not without a limitation as the protection of a nonqualified plan focuses principally on defining the so-called “private retirement plan” and determining the amount that the debtor will need to have to provide for retirement needs.

When properly structured, it makes your liquid assets unreachable. Often times, even if you set it up after the lawsuit has been filed.

It is usually more expensive to set up than other asset protection structures. However, if you are facing the possibility of losing all your assets to a creditor, it always makes sense to pay for a foreign trust.

None. A foreign trust will neither increase nor decrease your taxes. It is treated in exactly the same manner as your living trust. You will continue to report the income of the trust on your income tax return.

Yes, if properly structured. In the three primary foreign trust jurisdictions (Saint Vincent, Cook Islands, Nevis) there have been over 15,000 asset protection trusts set up. There have been approximately 6 reported cases of creditors successfully piercing a foreign trust. All 6 cases involved trusts that were poorly drafted, and some included debtors who engaged in egregious criminal conduct.

Yes. Just because the trust is governed by the laws of a foreign country, it does not mean that the trust holds its money in that country. The trust can have a bank account in the U.S., own a mutual fund in Switzerland, and real estate in Tuscany. However, if you are being pursued by a very aggressive creditor, we recommend that the assets of the foreign trust be outside the U.S.

Some clients worry that the foreign trustee supervising their trust may run off with their money. We work with large and very reputable trust companies and we have maintained relationships with these trust companies for years. But, if that is not enough, we can set up an advanced foreign trust structure that would allow you to remain in complete control of your assets. No one but you will have signature authority on the bank account of the trust.

Yes, and often much safer than investing in the U.S. Many European financial institutions have been around for hundreds of years. They have survived world wars and financial catastrophes. These are usually very large institutions that simply do not advertise their services in the U.S. and are not well known to U.S. investors. It surprises many Americans to find out that many of the world’s largest banks are names that they have never heard before. For example, BNP Paribas is larger than either Bank of America or JP Morgan Chase.

There are numerous investment choices available offshore. Private bank accounts (currently paying between 5-6%), brokerage accounts (with returns ranging up to 30%), guaranteed annuities 9with returns between 1-10%) and many others. While we are not investment advisors, we would be happy to introduce you to our contacts in the offshore investment world so that you can learn about your options.