Are you concerned about losing your family’s assets to creditors, lawsuits, or steep estate taxes? Many of our New York clients have faced these worries. That’s why we’re taking a closer look at Family Limited Partnerships for asset protection – a helpful tool to safeguard family wealth and lower estate and gift taxes.
We’ll clearly explain how an FLP works, its benefits, the pitfalls you’ll want to stay clear of – and how it can fit into your overall estate plan. If protecting all you’ve built for your family’s future is important to you, keep reading.
What Is a Family Limited Partnership (FLP)?
A Family Limited Partnership (FLP) works as a legal structure where family members join together as business partners. It splits ownership into two types: general partners who make decisions and limited partners who own assets but have less control.
Definition and key features
A Family Limited Partnership (FLP) is a legal setup we often suggest to clients in New York City who want to protect family wealth. An FLP creates two types of partners: general partners and limited partners.
Usually, parents serve as general partners and keep control over assets, while kids or grandkids become limited partners and receive financial gains. The great thing about an FLP is its flexibility – general partners can manage all the assets even if they hold just a tiny share, sometimes as small as 1%.
They can then pass 99% of the economic value directly to younger family members.
FLPs offer New York families a powerful shield for their assets while creating a clear path for wealth transfer that avoids probate entirely.
For tax purposes, FLPs function as pass-through structures, meaning partnership profits or losses show up directly on the partners’ personal tax returns, based on ownership percentages.
This setup often provides useful tax benefits for family financial planning. Partners can gift limited partnership interests yearly under the annual gift tax exclusion, helping shrink their taxable estates gradually.
The FLP structure also gives solid protection against creditors, since limited partners cannot demand payments or sell their shares without approval.
How FLPs protect family wealth
Based on the setup we discussed, Family Limited Partnerships (FLPs) can protect your family’s assets in a big way. We build these partnerships precisely to safeguard wealth from potential outside risks.
Using an FLP means placing important things – such as real estate, investments, or stakes in businesses – within one secure entity. This structure safeguards your wealth from creditors looking to make claims against individual family members.
Creditors face legal limits; to get any share of profits or payments from the FLP, they first need a court-issued charging order.
With FLPs, the protection doesn’t stop there. Creditors aren’t allowed to sell partnership assets or seize control of the FLP itself. Instead, they must wait for payments controlled by general partners – usually the parents.
This setup gives families extra bargaining strength during settlement discussions with creditors. Many New York families find this particularly useful, since lawsuits happen often here.
FLPs help parents pass down their wealth to children, without giving up control over their assets. Balancing asset safety with continued parental authority makes FLPs appealing to NYC families focused on protecting wealth for the long term.
Benefits of Family Limited Partnerships
Family Limited Partnerships offer many perks beyond just tax savings. They give you real protection from lawsuits while letting you keep control of your assets.
Asset protection and liability limitation
Protecting your assets is a big deal, especially for wealthy families in New York City. One good option is a Family Limited Partnership, or FLP. This legal setup helps guard your assets against lawsuits and creditors.
With an FLP, you place valuable property into a special partnership that offers strong legal safeguards. The general partners stay in charge of making profit distributions, so creditors face delays getting payments.
This can create serious obstacles for anyone trying to grab your wealth.
New York law restricts what creditors can do with assets in an FLP. Creditors are only allowed a charging order, which means they can grab profits or payouts – but not the actual assets themselves.
Clients often value this advantage because if a family member ends up dealing with legal issues, that person’s creditors can’t directly reach the assets in the partnership. Some NYC families even use FLPs to regularly pay partners through salaries or loans, which stay safe from charging orders, too.
To make sure your FLP provides maximum protection, set it up carefully with quality legal advice and accurate accounting.
Minimizing estate and gift taxes
Family Limited Partnerships (FLPs) give New York families big tax savings when they pass wealth down to their kids. My team sets these partnerships up carefully, so clients save as much as possible on gift taxes.
Back in 2022, the lifetime gift and estate tax exemption was $12.06 million per person, allowing families to pass on large amounts of money or property without extra taxes.
My clients get discounts worth between 30% and 60% off the fair market value of limited partnership interests. These reduced values happen because limited partners don’t have final say in partnership choices.
We also structure transfers carefully, to make the most of annual gift tax exclusions and boost savings further. Tax advantages don’t stop after setup, either. Kids receiving limited partnership interests often end up paying lower income taxes on their FLP earnings.
Proper formation and solid record-keeping keep IRS scrutiny at bay. Careful planning and clear documentation help these partnerships stay effective and safe.
Asset Protection Strategies in Estate Planning
Here in New York City, many families wisely protect their money by using smart legal options. Irrevocable trusts are popular choices, since they shield your assets from creditors by turning them into completed gifts.
Our clients often rely on retirement accounts, like 401(k) plans, because federal law protects these savings from claims. Privacy is another big factor, too. Placing your property or money in a trust keeps financial details out of public records, which lowers the risk of lawsuits.
Asset protection fits best into a broader estate plan – it’s not just one small action. We work with NYC residents to build plans that match their personal needs and follow legal guidelines.
The exact plan depends on the assets you hold, your household situation, and your financial goals.
Limited Partnerships among family members have unique tax benefits that often save your heirs a lot of money.
Estate and Gift Tax Planning with FLPs
FLPs offer New York families major tax savings through smart gift planning. We’ve seen many clients use this tool to pass wealth to their children while cutting their tax bills. In 2022, the lifetime gift and estate tax exemption reached $12.06 million per person, but proper FLP structure helps families save even more.
Parents can gift limited partnership interests to their kids each year up to the annual exclusion amount without paying gift taxes.
The tax magic happens through valuation discounts on these limited partnership interests. Since limited partners can’t control the FLP, their interests are worth less than their share of the assets on paper.
This discount lets parents transfer more actual value while using less of their lifetime exemption. The key is proper formation – the IRS watches these arrangements closely. Let’s look at how the roles of general and limited partners affect your control over family assets.
Key Considerations When Forming an FLP
Setting up an FLP demands careful planning about partner roles, tax rules, and paperwork – read on to learn the key steps for creating a solid family partnership that will stand up to legal scrutiny.
Role of general and limited partners
A Family Limited Partnership (FLP) involves two clear roles, each with its own purpose and benefits. The general partners run the FLP, choosing investments and handling daily tasks.
These partners also carry full liability for debts the partnership owes, meaning their personal assets can be taken, if financial trouble arises. Limited partners, usually younger family members such as children or grandchildren, hold a quieter position.
They own shares in the partnership without controlling daily choices or investment decisions. Because limited partners have no direct control, creditors can’t force them to sell their part to settle debts.
This structure neatly separates control from ownership. Parents can pass ownership shares to younger relatives without giving up daily control or management decisions. By staying general partners, they keep deciding how the family’s investments or business run.
Meanwhile, the limited partners gain automatic protection against creditors reaching their personal assets. This separation creates an effective shield for family wealth that can endure over many years.
To keep family harmony and avoid tax issues, the partnership agreement should clearly and plainly outline each person’s role and responsibilities.
Importance of proper planning and documentation
Good planning and detailed paperwork are key to setting up a strong Family Limited Partnership. Many New York families hurry through the FLP setup, skipping essential documentation, and face IRS trouble later.
Creating an FLP typically costs between $8,000 and $15,000, so careful prep really matters. Our team helps families write clear partnership agreements that clearly define the rights and responsibilities of each partner.
These agreements must clearly state a genuine business goal beyond simply saving on taxes, so that they hold up under legal review.
Solid documentation continues well after creating the FLP. Our experts guide families to maintain accurate records of meetings, property transfers, and cash payments. Clear records prove your FLP operates like a legitimate business.
IRS agents often closely inspect how families actually manage their FLPs day-to-day. Weak documentation could lead the IRS to label your FLP as nothing more than tax avoidance. Getting an experienced professional to properly value assets transferred into the FLP is another important step.
Correct valuation will help protect your assets from tax challenges and safeguard your family’s money for future generations.
Business Succession Planning through FLPs
Family Limited Partnerships (FLPs) provide a clear path for New York City business owners looking to hand over their companies to their children. Facts highlight why this matters: only 15% of family-owned businesses actually have clear succession plans in place, and barely 30% survive into the second generation.
Our clients in NYC often choose FLPs to gradually transfer business control, protecting key assets during the process. This arrangement fits perfectly for family-run retail stores, real estate firms, and service businesses operating across all five boroughs.
Parents remain in control as general partners, yet pass limited partnership shares to their children. This arrangement gives the younger generation time to learn the business, without handing them full authority immediately.
FLPs also go well alongside buy-sell agreements, laying clear groundwork if one of the owners retires or passes away. Many NYC business owners we work with also consult their CPAs, who help design FLP plans meeting both family priorities and tax objectives.
Potential Drawbacks of FLPs
Family Limited Partnerships have some real issues to watch out for. Setting up and running an FLP can get very complex, with tax rules that change often and legal details that need expert help.
Legal and tax complexities
Forming an FLP can feel tricky, because it comes with many legal rules you need to watch. If your family claims valuation discounts, the IRS will look extra closely. In 2022, the lifetime gift and estate tax exemption was set at $12.06 million per person – but if your FLP isn’t set up correctly, you can lose important tax benefits.
Many clients we’ve worked with in New York ran into expensive trouble, because paperwork wasn’t done right, or personal and partnership assets got mixed together.
Creating an FLP means you’ll need precise legal setup and regular upkeep. Attorney fees, annual meetings, and the costs of filing taxes can quickly increase expenses. Our clients in New York have to follow strict business operation rules, to keep their FLPs valid in the eyes of the law.
The IRS often challenges FLPs if they believe the main reason for creating them was tax avoidance, rather than running a real business. Working with a skilled tax attorney and an estate planning lawyer can help you avoid these strict IRS issues.
Risks of improper structuring
Legal and tax troubles aren’t the only risks from poorly structured Family Limited Partnerships (FLPs) – New York families face other serious pitfalls, too. I’ve seen clients often mix personal money with business accounts, losing the very asset protection FLPs offer.
This mistake can leave personal assets wide open to lawsuits, exactly the opposite of your original goal. Courts look closely at how you manage the FLP funds, and they can toss aside the entire arrangement if you don’t follow their rules.
Fraudulent transfers raise big red flags as well. Say you owe creditors $100,000 but move $70,000 into an FLP – you risk courts undoing that transfer altogether. The IRS pays special attention to FLPs under Revenue Rule 77-137.
Under this rule, creditors with charging orders might end up getting your profits, along with their related tax obligations. My New York clients always need clear records and firm boundaries between personal finances and FLP assets.
The protection FLPs provide relies heavily on sticking to these procedures right from the start.
Family Limited Partnerships (FLPs) are a smart and practical way to protect your assets and pass them along to your family. We’ve guided plenty of families across New York in setting up FLPs to shield their savings from creditors and lower their taxes.
With a well-designed FLP, you stay in control of your assets, but your kids still receive financial advantages. Good planning from a skilled attorney helps prevent mistakes that could cost you later.
Your family deserves reliable financial protection, making FLPs an important part of your estate plan.
Get help setting up a Family Limited Partnership. Click below to book a consultation today!
