CENTER FOR ESTATE PLANNING
Estate Planning and Asset Protection
One of the goals of estate planning for some people is the protection of income and assets from creditors’ claims and tax collection. This process uses techniques that comply with existing state, federal and tax laws. Using these techniques allows a person to protect financial reserves, personal property, real estate, and other assets for future generations. These techniques are especially important for those persons who work in the types of occupations that are a high risk and there is no way to protect against legal liability otherwise. If you are interested in working with one of our estate planning attorneys to create a plan to protect your assets, contact our firm today to schedule a consultation.
Using Family Limited Partnership for Asset Protection
One of the best strategies for asset protection is the use of a family limited partnership (FLP) which is very useful for a family whose members want to preserve their assets while retaining control over them. The FLP entity is set up in a fashion similar to traditional partnership, with a general partner (normally a corporation owned by the parents) and limited partners (normally the children). The general partners manage the partnership’s assets, make all investment decisions and all decisions concerning the distributions of money from the partnership, share in all of the income generated by the FLP and are responsible for the FLP’s debts. The limited partners, on the other hand, have an ownership interest in the FLP and share in the income generated by the FLP, but have no control over the FLP’s activities, including when, and if distributions are made from the FLP. In addition, the limited partners are responsible for the FLP’s debts only to the extent of their ownership interest.
A qualified estate planning attorney can assist you in using the FLP to reduce estate and gift taxes by taking advantage of valuation discounts, the annual gift tax exclusion and the unified credit.
- Valuation discounts. Since the interest in a FLP is generally not marketable and cannot be sold on the open market, a discount for lack of marketability is used many times, which can reduce the FLP’s value for estate tax or gift tax purposes. A minority discount may also be available to reduce the valuation of a FLP interest given to a person who has a smaller and noncontrolling interest in the FLP.
- Annual Gift Tax Exclusion and Unified Credit. Gifts of an individual’s FLP interest qualify for the annual gift tax exclusion up to a certain dollar amount and, if the value of the interest does not exceed that annual amount, may be exempt from federal gift tax. Similarly, if a gift exceeds that amount, part of that gift amount may be shielded from tax under the unified estate and gift tax credit, which is referred to as the unified credit or applicable exclusion.
Since the valuations discounts can reduce the value of the gift of an interest in a FLP for estate and gift tax purposes, there are greater benefits to making gifts of a FLP than for assets transferred outside of the FLP.
Using a FLP to Shield Assets From Creditors
A FLP can be used to shield assets from creditors, as the person does not have any direct right to the assets. This protection may be limited by state law. Obviously, the FLP cannot be used to shelter assets where the assets are transferred into the FLP to defeat the rights of an existing creditor, particularly a creditor who has already received a judgment. This is known as a transfer made to defraud a creditor.
As long as the transfer is not being made to defraud an existing creditor, in the event that a new creditor wants to sue a person who has placed assets into the FLP, it is very difficult for the creditor to levy against those assets.
The use of a FLP or other estate planning techniques can protect your assets from the claims of creditors. The gift of a FLP interest can reduce the estate or gift tax value of the gift as a result of the use of valuation discounts, the annual gift tax exclusion and the unified credit. This can result in the significant preservation of your assets. If you have questions about asset protection for your estate or any other estate planning objectives, contact our firm to schedule a consultation with an experienced estate planning lawyer.