FAMILY LIMITED PARTNERSHIP

     Family limited partnerships have become a popular way of saving taxes and protecting assets. By placing assets in a partnership, the general partner can maintain control over the assets and, at the same time, an interest in a partnership is valued for estate tax purposes at less than the value of the assets themselves.

     A family partnership may either be a general or limited partnership. In a general partnership, all partners have unlimited personal liability for partnership debts and all are legally entitled to participate in the management of the partnership business. In a limited partnership, the most popular form, only the general partner is fully liable for partnership debts and may participate in the partnership business. The limited partners are liable on partnership debts only up to the value of their investment but may not participate in the partnership business.

FAMILY LIMITED PARTNERSHIP STRATEGY

     There must be a business purpose for forming the partnership. A certificate is filed with the State and there is a written formal partnership agreement that spells out the rights and obligations of the partners. Assets should actually be transferred to the partnership as the true owner of the assets. In a typical family limited partnership, you contribute assets to the partnership in exchange for both general or limited partnership interests and then make tax-free transfers of limited partnership interests to other members of your family. The limited partners have not right of control and are only entitled to a proportionate share of the income distributed by the partnership, if any, and to their proportionate share of the partnership assets upon termination of the partnership. You retain the power to invest and sell partnership assets and retain power over the distribution and timing of partnership income but are under no obligation to distribute income.

ESTATE PLANNING

     A family partnership is an excellent estate-planning tool; it allows you to transfer ownership interests to the younger generation without loss of control. A partnership agreement may have restrictions on the transfer, assignment or liquidation of partnership interest, and this may allow you to claim a substantial discount in the value of the asset transferred. You, as general partner, have exclusive management and investment control over the partnership assets, and are able to reduce your taxable estate by making gifts of the limited partnership interests to your children or grandchildren in $11,000 amounts as annual gifts until all of the limited partnership interests are transferred. If discounts are obtained an even greater amount may be transferred. Through the use of a family partnership estate tax savings of up to 40 percent may be possible.

ASSET PROTECTION

     As a general rule, a limited partnership may not be broken up or dissolved if one partner is sued; the assets of the limited partnership are protected from the individual creditors of a limited partner. It is difficult for creditors of the limited partners to reach the underlying partnership assets. This is a significant advantage for parents who want to transfer assets to their children, but are concerned that a child might be sued or that a child's former spouse might obtain such assets in the event of a divorce. A creditor's remedy against the interest of a partner (general or limited) is confined to a " charging order" against the partner's partnership interest and the creditor cannot attach the partnership interest itself. A charging order allows the judgment creditor to receive the debtor partner's share of distributions made from the partnership. Because the general partner controls the amount and timing of partnership distributions, the value of the charging order may be minimal or worthless. The judgment creditor would be treated as the owner of that portion of the partnership interest for income tax purposes and thus would be required to pay taxes on income it never received. If the debtor partner can demonstrate that the partnership has a valid purpose other than protecting assets from creditors, e.g., estate planning, the judgment creditor's success at attaching partnership interests seems unlikely. A limited partnership shields a debtor-partner's interest from all but the most-determined creditors. Most likely, a creditor may hold nothing more than an uncollectible charging order against the interest of the limited partner.

     With proper planning, a family partnership can be an effective estate-planning tool, allowing you to transfer a large asset from the older members of the family to the younger members while retaining control of the partnership and assets. A family limited partnership can also be an excellent asset protection device.

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