The Family Limited Partnership – Part 2, Legally Mine

Continuing from the previous post 

For those of you who missed the first post, this is a series of posts regarding the Family Limited Partnership (see link above) – an entity that Legally Mine advocates in their lectures and presentations.  These are excerpts taken from the book, “The Asset Protection Bible.”

Family Limited Partnerships vs. Limited Partnerships


Family Limited Partnerships (FLPs) are used to protect family assets and use family members as partners. Interests in non-Family Limited Partnerships (LPs) are often sold commercially. Three major considerations exist:

  1. 1.      State filing requirements are identical for FLPs and LPs. The same Limited Partnership Agreement and Certificate of Limited Partnership form can be used for either a FLP or a LP.
  2. 2.      IRS regulations are the same for FLPs and LPs and the IRS Code 704E acknowledges that families can use Limited Partnerships.
  3. 3.      State and federal Securities Laws do not generally govern Family Limited Partnerships. Commercially sold LPs, however, are often required to comply with complex state and federal securities laws that are not applicable to FLPs.

Use of Multiple Limited Partnerships


Generally, a family’s safe assets (assets with a low probability of creating a lawsuit) could be placed together into one Limited Partnership, regardless of their value. Multiple partnerships. however, may be suggested for a family’s unsafe assets to protect the assets from lawsuits arising from within the partnership itself. For example, a family with several rental properties may use multiple Limited Partnerships to protect the properties from a liability associated with only one piece of real estate. Assets that have inherent liability risks (e.g. aircraft, automobiles, rental real estate, boats, etc.) should not generally be placed within Limited Partnerships containing assets that are considered to be safe (e.g.: bank accounts, brokerage accounts, stocks, bonds, collectibles, artwork, jewelry, etc.).

Advantages of a Corporate General Partner:


  1. Liability Protection – For unsafe assets, a Corporation acting as the general partner should be considered. With a sole corporate general partner, individuals are not exposed to the unlimited liability of the general partner. Only the capital of the Corporation is exposed, rather than the assets of the individual(s) who might otherwise have served as general partner.
  2.  Fringe Benefits – The Corporation is an excellent vehicle for compensation and fringe benefit programs. The partnership typically pays management fees to the Corporation. Those fees may be used to pay salaries and fringe benefit programs for family members employed by the Corporation.
  3. Continuity – The use of a Corporation as the general partner provides continuity for the partnership. When a general partner who is an individual dies (or becomes bankrupt, or withdraws), the partnership may be at risk. A Corporation, on the other hand, is perpetual.

Charging Order Protection


According to the laws of the Revised ULPA, the major remedy that a creator of a Limited Partner gets is a changing order against that partner’s interest in the partnership. A charging order gives the creator no rights to control or attach the assets of the partnership, but only the right to receive the partner’s income distributions, if any. Because family members control most Family Limited Partnerships, the general partner will often cease or alter distributions, resulting in no money being distributed to the creator.

It is important to remember that assets in a Limited Partnership may be subject to seizure only by a creator of the partnership, itself. Assets held in separate Limited Partnerships are not available to creators for obligations or liabilities created by other Limited Partnerships or by the limited partners, themselves. This is the primary asset protection characteristic of Limited Partnerships.

Instead, a non-partnership creditor, who is a creditor of one of the limited partners, can only get a charging order against that limited partner’s interest. This charging order limitation means that:

  1. A judgment creditor cannot be substituted as a partner in the Limited Partnership.
  2. A judgment creditor is treated by the IRS as an assignee of the income interest only.
  3. A judgment creditor has no vote or management rights in the Limited Partnership.
  4. A judgment creditor pays taxes on income even if he has not received it.
  5. A judgment creditor is not entitled to seize assets or demand distributions from the Limited Partnership.
  6. There is no seizure of a limited partner’s ownership percentage even if the creditor obtains a judgment against the limited partner, unless the remaining partners approve, the partnership agreement permits sale, and the judgment creditor assumes all obligations of the prior limited partner.

In recent years, some have suggested that the charging order protection has been

diminished or weakened. However, careful scrutiny of the statutory changes and the cases construing those changes demonstrates that the charging order is as strong now as at the time of its origins. Those who claim that the charging order protection has been weakened often point to changes in the 2001 version of the ULPA. Pursuant to those changes, which have not yet been adopted in most states, a court may even order a foreclosure of the charging order. However, any purchaser of the foreclosed Limited partnership interest becomes an “assignee.” This assignee is not a partner, is not protected by partner-to-partner fiduciary duty, is not entitled to participate in partnership affairs in any way, and has virtually no rights to obtain partnership-related information.

Moreover, the assignee who acquires a LP interest at foreclosure faces adverse tax consequences. The purchaser of a foreclosed partnership interest is considered a partner for federal tax purposes, even though not a partner under state partnership law. This means that the purchaser would be subject to tax on its share of the partnership’s income regardless of whether the partnership actually distributes any of that income.

Thus, the typical judgment creditor would not be excited at the prospects of foreclosure, and a foreclosure sale will typically draw no crowd. The foreclosure and sale may cause the dissociation of the partner whose interest is charged, if the relevant partnership statute or the partnership agreement so provide. But, if the other partners wish to avoid that result, they certainly can do so by agreement. This renders the charging order sufficiently unattractive that, as a practical matter, individual judgment creditors often avoid even trying to pursue assets protected in a Limited Partnership.

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