A family limited partnership (FLP) can be one of the most useful and successful asset protection and estate planning tools. There are two huge advantages in using FLPs – they are a nightmare for predators and creditors, and they can reduce tax liability. Your own FLP can reduce the value of your estate for gift tax purposes and estate tax purposes and reduce your income taxes, while allowing you to have full control of the assets, day-to-day operation, managerial administration, distributions, and investments held in the FLP.
In Florida there could be a huge difference in the outcome of a collection action or other lawsuit if the defendant had his business interests in an FLP rather than a corporation. An example is helpful in explaining the difference.
Assume that John operates his business with his son in the form of a corporation, with the father owning 60% and the son owning 40%. His neighbor Larry operates his business with his son in a family limited partnership, with similar ownership shares.
The attorneys representing John’s creditors know that if they obtain a judgment against John, they could levy against John’s interest in the corporation, take control of the corporation, and possibly liquidate the corporation to pay John’s debt.
On the other hand, the attorneys representing Larry’s creditors know that if they obtain a judgment against Larry, they could receive no more than a “charging order” against Larry’s FLP interest. Larry’s creditors would not gain control of the business and would have no power to force liquidation, or, for that matter, to force the FLP to do anything. The only power the creditor would have is to receive distributions that would otherwise go to Larry, if and only if, Larry decides to make distributions.
Larry’s FLP could continue operating and not make distributions. At the end of the year, the FLP would send out a K-1 to the creditor, requiring that the creditor pay to the IRS income taxes on the portion of the FLP’s profits attributable to Larry’s 60% interest in the FLP. This means Larry’s creditors could be forced to pay income taxes on “phantom income” that they never received.
Who do you think would be in the best bargaining position to settle the claim? Obviously Larry would have a big advantage. That advantage could even be present before a lawsuit is even filed, when the plaintiff’s attorney realizes that all his client would receive from a judgment is a charging order and the obligation to pay income taxes on income that his client never receives.
The attorneys of the Vose Law Firm would be happy to discuss the possibility of setting up a family limited partnership for your business. If you are interested, please call 407-645-3735 or 1-866-789-VOSE.
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