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Family Limited Partnerships

A Family Limited Partnership is a valuable estate and financial planning vehicle, which also has significant asset protection capabilities. A Family Limited Partnership is an arrangement that permits the division of the partnership’s interest between those partners designated as limited partners and those partners designated as general partners. General partners are those partners or entities, such as trusts, that manage and control the partnership’s assets and actions. Limited partners have no say in the ordinary operations of the partnership and have no personal liability beyond their interest in the partnership for any of its debts. Portfolio management of investments may be the business of the partnership.

Establishment of the Partnership

A Family Limited Partnership is established by a general partner or partners having a general partnership interest in a small amount, usually between 2–5 percent of the value of the partnership. A trust may be the general partner so that you can avoid probate and reduce estate taxes on the general partner’s interest. The remaining interest in the partnership is held by the limited partners. The general partner may also be a limited partner. In a family setting, the parents often will be the general partners and give limited partnership interests to their children.

Protection of the Partnership’s Assets

Family Limited Partnerships afford great protection of assets from creditors. A creditor of a partner is not entitled to any of the assets that are in the name of the partnership, because the personal debt that a partner has is not a debt of the partnership. A creditor is generally only entitled to what is known as a charging order against the partnership interest of the indebted partner, meaning that the creditor can only receive the distributions from the partnership that the indebted partner would receive. In circumstances in which there are claims against a partner, it is common for the general partner to stop making distributions in an effort to thwart the collection efforts of the creditor. Often, this leads to a significant compromise of any claim against the indebted partner.

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