The Attorneys at Loberg Law Office have drafted many Family Partnerships for clients with a range of estate and tax planning goals and desire. Family limited partnerships provide substantial estate tax benefits and asset protection advantages. Generally, a limited partnership is a partnership consisting of two classes of partners: general partners and limited partners. A general partner has general liability for all partnership debts, and he has the responsibility and authority to manage partnership business. The general partner controls the partnership’s assets, investments, and its business decisions. A limited partner has only an investment interest in the partnership, and he/she plays a passive role. A limited partner’s liability is limited to the amount of capital he/she has contributed to the partnership. To maintain the limitation on personal liability, the limited partner is prohibited from participating in any management or control over the partnership’s assets or business. The interest of a limited partner is transferable subject to restrictions set forth in the partnership agreement. One can be both a general partner and limited partnership simultaneously.
A family limited partnership is a limited partnership that consists of members of an immediate family, although extended family members may also participate in these types of partnership. In a family partnership, one or both spouses usually serve as the general partner, and the spouses, together with their children, are typically limited partners. At formation, the parents typically own nearly all of the limited partnership investment interests.
The interest of a limited partner in a limited partnership is not “exempt” from levy by creditors of the limited partner. A creditor of a partner has no right to seize assets within the partnership to satisfy the debt of a partner. This reflects the policy that it is more important to protect other partners’ interests in a partnership than it is to permit the creditor of just one partner to satisfy a judgment in a manner that might disrupt the partnership’s business. A creditor of a limited partner seeking to seize distributions from a partnership must apply to a civil court to obtain a charging lien against partnership distributions. The court upon application will issue a charging order against the partnership granting a lien to the creditor on any distributions earmarked to the debtor-limited partner. If the general partner awards no distributions to limited partners, then the creditor gets nothing.
In addition to protection from creditors, a family partnership also has tax advantages. Specifically, income earned by the limited partnership is taxable to the limited partners on a flow through theory, regardless whether the income is actually distributed to limited partners. If a limited partnership has taxable income and the general partner decides to retain the income within the partnership, the limited partners are still liable for the income tax. Generally, if a creditor has a charging lien on a limited partnership interest, and the general partner does not distribute partnership income, the creditor, not the debtor limited partner, is responsible to pay the tax on the allocated income. Therefore, the limited rights of the creditor/assignee make the family partnership an effective asset protection tool.
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