This article was posted on Sunday, Jan 29, 2012

Family Limited Partnerships (FLPs, often pronounced “flips”) are a reliable mechanism for protecting assets from creditors and reducing transfer taxes. An FLP is an entity for the benefit of and controlled by the family.
A senior family member puts real estate or shares of an operating business into the entity, then sells or gives away shares in the entity. Since the shares are difficult to sell outside the family, their value is discounted. A 30 percent discount is not unusual.
By reducing the value of the partnership shares for gift tax purposes, the discount reduces the taxes of transferred assets.
In California, creditors cannot force a liquidation of or distributions from the FLP. At most, a creditor gets a charging order giving him the right to the debtor family member’s distributions. In other words, the creditor becomes an assignee.
FLPs also shield assets in the other direction. That is, they protect family members from liabilities arising from the property held in the entity. For example, if a tenant is injured on the premises, the creditor can reach only assets in the entity and cannot pierce the veil to get the partners’ personal assets.

Another benefit to FLPs is they avoid probate on real estate, not only in California but in other states. By putting a building into an FLP, real property is converted into intangible personal property.
FLPs, unlike corporations, are not subject to federal corporate income taxes. On the downside, use of FLPs invites tax audits. The IRS may challenge whether the FLP was created for a bona fide business purpose. It often disputes the amount of the discount given to the assets held by the FLP. Good records are essential for defending these challenges. Another consideration is whether the transfer to the FLP will trigger a documentary transfer tax, which can be significant.
It is critical that senior family members properly maintain the FLP, so that its separate entity status is recognized. Management and control of the FLP remain with the general partner, permitting the senior family member to control the real property or family business even though limited partnership interests have passed to children or others.

Edgar Saenz is a Los Angeles-based estate planning attorney. He is a graduate of Stanford Law School. He is a member of the Trust and Estates sections of the State Bar of California and the Los Angeles County Bar Association and serves on the board of the Culver Marina Bar Association. Telephone: (310) 753-1668; email contact  [email protected].
The information in this article is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice or to substitute for obtaining legal advice from an attorney licensed in the appropriate jurisdiction.

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