1. General Structure: Most people think of a partnership as a form of engaging in and investing in an active business. For instance, many law firms and accounting firms are established as partnerships. Similarly, many people invest in limited partnerships in order to receive a portion of the profits earned by the partnership. While a partnership is a way for a group of people to pool their resources and divide the profits therefrom, the usefulness of a partnership doesn't end with active business. Family membrs can also pool their resources and divide the profits therefrom. When this pooling of resources is done by a family, the result is a family limited partnership, or FLP.

In an FLP, the husband and wife will typically name each other as general partners of the partnership. Selected family assets (such as stocks or real property) are then contributed to the partnership. The children can then become limited partners in the FLP. The advantage of giving a limited partnership interest to the children instead of the family's assets themselves (i.e. cash, securities or other property) is that the parents retain total control over how the property is invested and managed. The children own a portion of the assets in the FLP, but have no control.

2. Tax Advantages of Using an FLP: Typically, the husband and wife will give limited partnership interests to the children gradually, over a period of several years. This provides significant tax savings for at least two reasons. First, the children, as limited partners, are allocated a percentage of the income of the limited partnership. Since children typically are in a lower tax bracket than their parents, a substantial amount of the family's income can be shifted to the children.The second tax advantage from using an FLP can be even more significant. A gift of a limited partnership interest is considered taxable for gift tax purposes. However, the IRS allows anyone to give away up to $13,000 per year to any other person without any gift tax consequences. A husband and wife together can give up to $26,000 per year to any other person without gift tax consequences. The advantage of giving a limited partnership interest to the children instead of cash is that there is no tax on any subsequent appreciation of the children's share of the assets of the FLP. There are two important consequences of this conclusion: first, the parents are not subject to any gift tax when the property increases in value, and second, the appreciated value of the assets, not merely the value of the assets at the time of the gift, is not subject to estate tax.

3. Asset Protection Advantages of Using an FLP: The benefits of using an FLP do not stop with tax savings. An FLP can provide significant asset protection advantages as well. These advantages stem from the fact that a general partner in an FLP is no longer treated as owning the individual assets that were contributed to the FLP. Rather, a general partner owns only one asset: an interest in the FLP.The laws of most states provide for significant limitations on the ability of a creditor to seize and enjoy a partnership interest. In particular, creditors of persons holding partnership interests are limited to obtaining a "charging order." A creditor who obtains a charging order against a partnership interest generally has only the rights of an assignee of the partnership interest. In other words, a charging order entitles the creditor only to the distributions to which the debtor would be entitled. A court may not order the sale of partnership assets to satisfy an individual partner's debt. If the partnership agreement is drafted properly, the creditor's access to partnership assets can be effectively foreclosed. It should be noted that if a creditor is able to secure a charging order, the debtor's ability to receive benefits from partnership assets will be restricted. Even so, since a charging order is of little monetary value to a creditor, it is less likely that the creditor will spend time and money obtaining the charging order in the first place.

In addition to the limited remedies available with respect to partnership assets, unfavorable tax consequences may further deter creditors from seeking a charging order against an FLP. The IRS has ruled that a judgment creditor holding a charging order is required to recognize the debtor's share of partnership income so long as the creditor acquires substantially all dominion and control over the interest, even if no distributions were made to the creditor. Thus, a creditor who seeks a charging order against a properly structured FLP would be faced not only with a poor prospect of obtaining anything of value, but also with the likelihood of being taxed on the debtor's share of partnership income.In most cases, the protection of an FLP is available even in bankruptcy. Many states' laws provide that a limited partnership need not dissolve with the bankruptcy or withdrawal of a general partner so long as there is another general partner or a provision for choosing one. Careful drafting of the partnership agreement is critical in this context.One caveat to the use of an FLP is that the FLP itself can be subject to a lawsuit. Since the general partners of any limited partnership, including an FLP, are personally liable for the debts of the partnership, if the partnership assets include real estate or other assets that could generate liability, the general partners will be subject to that liability. Given this situation, there are at least two alternatives for structuring an FLP that will hold such "high risk" assets. The first is to form a corporation and name it as the general partner. If the corporation is adequately capitalized, it will be respected as the general partner for asset protection purposes.

The second alternative is to transfer all general partnership interests to a foreign situs trust. Such a transfer puts the general partnership interests out of reach of domestic creditors, in most cases. This arrangement constitutes the pinnacle of wealth preservation planning, and is discussed in more detail, below.

4. Legal Requirements: Since an FLP is a bona fide limited partnership, it must conform to all requirements under state law pertaining to the formation of limited partnerships. In most states, these requirements are not onerous. Federal tax law imposes certain other requirements.

By way of summary, there must be at least one general partner and at least one limited partner. The general partner must retain, at a minimum, a one percent interest in the partnership. The general partner will determine if and when distributions of partnership income will be made. The general partner may claim a salary from the partnership. Federal tax law also requires that capital (i.e. assets) be a "material income producing factor" of a limited partnership. In most cases involving FLP's, this is not a serious concern because family assets (i.e. stocks, securities, real estate) do constitute capital. Moreover, in most cases all of the FLP's income will be generated by such assets. Thus, capital is a material income producing factor.