How do you protect your property from seizures resulting from personal claims against you or a member of your family? One of the most popular vehicles promoted to protect personal assets is the family limited partnership (FLP). Read on to learn how to protect your property.

Family Limited Partnership
An FLP is a limited partnership created by an agreement between family members. It is typically used as a business- and financial-planning entity that combines business operations with financial planning, estate planning and asset protection. Typically, the FLP is structured with at least one general partner and several limited partners.

The general partner(s) is entitled to a pro-rata share of the partnership's profits and losses, and enjoys all the rights of management and control of the partnership. The limited partners have the same pro-rata right to partnership profits, losses and distributions as the general partners, but have no rights of management or control of the partnership (unless the limited partner is also a general partner or acting on behalf of the general partner). The general partner(s) can be an individual, such as the parent(s) of the family establishing the FLP, or it may be an entity, such as a corporation or limited liability company controlled by the parents. The limited partners usually consist of the children of the parent general partners and, at least initially, the parents can be both general and limited partners.

As an asset-protection vehicle, an FLP offers a level of protection for the assets you transfer to the partnership while allowing you to maintain control over the transferred assets. While the FLP owns the transferred assets, the general partner owns a controlling interest in the FLP. This individual manages and controls the affairs of the partnership and can buy or sell any partnership assets, retain proceeds from those sales or distribute the proceeds to general and limited partners.

Why Is an FLP a Good Asset-Protection Device?
Let's say your dog bites your neighbor, who sues you and receives a $500,000 judgment against you. Excluding any liability insurance that might be available, your neighbor would like to satisfy the judgment from assets you own. However, he finds that you no longer own bank accounts, investments or property as an individual. Instead, most of these assets are held by the FLP in which you have a controlling interest. Generally, your neighbor/creditor cannot seize partnership assets to satisfy the judgment against you, nor can a judgment creditor reach into the partnership and take specific partnership assets to satisfy a partner's debt or judgment. Since title to the assets is in the name of the partnership, the assets in it may not be taken to satisfy the judgment.

Since you do have an interest in the FLP, your creditor can attempt to satisfy its judgment through use of a charging order, which gives it the right to any distributions from the partnership to the debtor/partner. The order remains in effect until the creditor has been paid in full or until the expiration of a statutory time limit. In other words, money paid to you out of the partnership can be seized by the creditor until the amount of the judgment is satisfied. To avoid this, the general partner and controlling member of the FLP can direct that the partnership retain rather than distribute distributions.

In addition to the charging-order remedy, some states allow a creditor to foreclose on the debtor/partner's interest. An order of foreclosure means that the creditor can seize and sell the debtor/partner's interest in the partnership. This action entitles the creditor to the debtor/partner's share of partnership assets, even to an amount exceeding the value of the judgment. A creditor with foreclosure rights is in a better position to satisfy his claim from partnership assets if you are, in fact, a partner.

The Benefits of Trust Assets
If neither you nor your spouse is a partner of the FLP, you have no direct partnership interest to seize. One way to accomplish this is to set up the FLP interest to be owned by a trust specifically created for this purpose.

Trusts have many varied uses in asset protection planning. A few trust types and uses include these three:
Inter-Vivos or Revocable Living Trust
A revocable living trust has become a staple for transferring assets at death. Property in a trust generally does not pass through probate, so the transfer is private and without court interaction (which can cause delays and cost probate filing fees). Trust assets pass to beneficiaries as quickly as you wish according to the terms of the trust.

Irrevocable Life Insurance Trust
An irrevocable life insurance trust is used primarily to own life insurance for the benefit of your spouse or children. By having the trust own the policy, if certain other requirements are met, the value of the policy will not be included as part of your estate, thus escaping estate taxation. Generally, you will not have control over the trust or its assets.

Qualified Personal Residence Trust
In addition to housing your family, your home is often worth more than any other single asset you own, and its loss could be disastrous both financially and emotionally. A qualified personal residence trust can protect your home and transfer it to your children over time.

After transferring your interest in the home to the trust, you retain the right to live there for a specified number of years. At the end of the term or at your death, whichever occurs first, the home passes to the trust beneficiaries (usually your children). The house will not be included in the value of your estate, and thus will escape estate taxation, if you outlive the term of the trust. However, if you die prior to the end of the term, then the entire value of the home is included in your estate.

A Word About Fraudulent Conveyances
While protecting assets from potential claims is both practical and necessary, deliberately hiding assets from a creditor whose claim has already been realized, or attempting to defraud creditors after their claim has been realized, may be considered a fraudulent conveyance punishable by fine, imprisonment or both. If you deliberately shelter assets to defraud or delay creditors, your liability may extend beyond the assets you're trying to protect. Check with your legal advisor about the fraudulent-conveyance laws in your area and be sure your asset-protection plan stays clear of violating those precepts.

The Bottom Line
Because we live in a litigious society, planning to protect your assets should be a priority. Don't put yourself at risk for a disaster you can mitigate with proper planning. By choosing the asset-protection structure or structures that best suit your situation, you'll be able to safeguard your finances for yourself and your family.

Related Articles
  1. Retirement

    Protecting Your Retirement Assets

    Your golden years are meant to be stress free. Keep them that way by protecting your assets.
  2. Bonds & Fixed Income

    Protect Assets, Create Income, Retire Happy

    Find out what you can do to ensure a comfortable transition to your post-work years.
  3. Options & Futures

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  4. Personal Finance

    The Top 6 Books for Estate Planning

    Here are six outstanding books that can help you with your estate planning.
  5. Estate Planning

    Estate Planning: 16 Things To Do Before You Die

    If you don’t plan your estate, your surviving family may have to deal with disputes and probate that were avoidable.
  6. Your Practice

    Advisors: $240B in Fees Up for Grabs by 2030

    Advisors have an opportunity to win generational assets over the next 15 years. Here are some tips on how to cater to different demographics.
  7. Personal Finance

    Want Your Will to Prevail? Don't Die Intestate

    If you die without making a last will and testament, you are said to have died intestate. What happens to your assets in this case?
  8. Home & Auto

    The Pros and Cons of Buying Vs. Building a Home

    Before you decide whether to buy or build a home, you should weigh the advantages and disadvantages of each scenario.
  9. Tax Strategy

    A Beginner’s Guide To Tax-Efficient Investing

    Tax-efficiency is a measure of how much of an investment’s return remains after taxes are paid.
  10. Real Estate

    Ultra-Luxury Real Estate: What's Hot, What's Not

    And is this a good time to buy? Here's the 2016 forecast for luxury residences in seven global markets, from Shanghai to London to New York City.
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  4. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  5. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  6. Does the FHA provide construction loans?

    The Federal Housing Administration (FHA) does provide construction loans for both new construction and rehab projects. The ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center