Pros And Cons Of FLP's (Family Limited Partnerships)
Recently someone recomended the use of FLP's to hold real estate and corporations, saying that in the event that someone DOES successfully sue you, they can only get to the "dividents" of the FLP. If you structure it right you can make it so you get paid by management fees, loans, etc and there are no official dividends. Additionally, whoever has the charging order against your FLP now must pay the taxes on the net income of the FLP even though they're not getting a cent of it.
Sounds like a pretty sweet setup. Anyone have any experience or opinions about this???
I have seen this type of structure (using a partnership) for asset protection and asset transfer planning. The idea is that there is a General Partner Interest(GP) and a Limited Partner Interest.
By the nature of the tax consequences of a partnership, taxability flows out every year (its a pass-thru entity), however the GP decides when distributions are made. So if you had a 1% GP interest and someone else ended up with your LP interest they can possibly get taxability with no distributions (ever). So if you gave some LP interest to your daugter and she got divorced and her ex ending up with the LP interest, he will have to report taxable income and never receive any cash (this could increase his tax bill substantially- assuming your not creating tax losses)... usually you should be able to get him to sell back the interest dirt cheap.
The GP interest can be but in an S-Corp or you can just go with an LLC. To do what you are thinking of, the GP interest should probably go into an irrevocable trust.
This type of entity is also a great way to pass wealth to your heirs at a discounted tax rate since you may get lack of marketability discounts and minority discounts for gift tax purposes.
The partnership agreenment will outline who makes the decisions, when distributions occur etc.
It is a worthwhile tool. You should consult EXPERIENCED legal counsel to ensure that everything is drafted appropriately.
-Adam