By Doug Stanley

The Family Limited Partnership (a “Partnership”) has been actively used for more than 10 years. If you have invested in a Partnership then you already know about the benefits.

One benefit is asset protection. After you transfer an asset to a Partnership, if a personal judgment is rendered against you, the Partnership will create a roadblock, or barrier, in collecting on that asset. The reason for this asset protection is that you own a partnership interest instead of an easily collectible asset. That creditor protection gets stronger if you are not the one in control of the Partnership.

Also, if you later give away a partnership interest to a child or grandchild, then the Partnership provides asset protection for that child, because a partnership interest is harder to reach in the event of a divorce or judgement assessed against the child.

The Partnership also provides a way to leverage gifts. Each person may currently transfer up to $11,000 annually ($22,000 per couple) to an unlimited number of individuals free of estate and gift tax. By giving away partnership interests, instead of cash or other assets, you are able to increase the amount of your gift. This is because the partnership interest isn't worth as much as an outright gift of cash or securities. An $11,000 partnership interest gift can eventually pass around $15,000 of asset value to a child or grandchild, as valuation discounts apply. Because the partnership interest can't be sold easily, and also because the person receiving the gift is only getting a small piece of the Partnership, the law allows you to “discount” the value of the gift. The discount amount depends on the restrictions placed in the partnership agreement and the type of assets in the Partnership. It is not uncommon to see discounts between 25 and 35 percent.

When setting up a Partnership, a few simple steps should be followed:
First, the Partnership must be formed properly under state law. The assets are then properly transferred to the Partnership. Once formed, the Partnership entity must be respected. This means if an asset is owned by the Partnership, then the general partner of the Partnership (the one who is in control) is the one that makes decisions regarding investments, and not the person who made the contribution. There may be negative estate tax consequences if the creator of the Partnership continues with business as usual, with no regard given to the fact that a Partnership now owns the assets.

Also, the Partnership should not be used as a personal checking account. Distributions should not be made from the Partnership for regular living expenses. This indicates that the Partnership was really like an estate planning tool rather than an investment. You should retain enough liquid assets outside the Partnership to provide for your living expenses. Also, it is best if your personal residence or second residence is not an asset of the Partnership.
If distributions are expected, then it might be helpful to have a significant contribution to the Partnership by someone else. Making distributions to several partners based on each person’s ownership in the Partnership reinforces the argument that the Partnership is a separate business entity that should not be used for personal expenses.

Creating a successful case for a Partnership involves making the Partnership look more like a business investment, and less like an estate planning device used to dispose of your assets when you pass away. Partnerships have many advantages you may wish to discuss with your estate planning attorney.

Douglas J. Stanley is an estate planning attorney with Greensfelder,
Hemker & Gale, P.C. He has experience in individual estate administration,
closely held business succession planning and tax financial planning. He also has experience in business sales, purchases and other corporate and partnership taxation issues.

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