This is becoming one of the most popular methods to pass the equity in a larger estate to the heirs at a discounted rate, while retaining control, and at the same time, protecting the assets from lawsuits.
A Family Limited Partnership may be used to begin shifting ownership from your estate to your heirs without losing control. The Limited Partnership is becoming a more popular staple of estate planning for a number of reasons. A major one is for asset protection.
Partners hold the partnership property in a special form— a tenancy in partnership. Partnership assets are not subject to the debts of either the general or the limited partners.
If a creditor gets a judgment against one of the partners, the creditor applies for a “charging order” to enforce his judgment. This is an order by the court charging the partnership interest of the debtor partner. This means that if the partnership pays any income to the partner, it now must be paid to the judgment creditor. The creditor does not become a partner of the partnership, but is entitled to receive any distributions which would be given to the debtor partner.
The General Partner of a Family Limited Partnership can choose to distribute the partnership income, or to accumulate such income and reinvest it in the Partnership. But he must still issue a “K-1″ (a tax report) showing each partner’s share, and tax liability. So, if general partner decides not to make a distribution of income, the creditor only gets the “K-1″. He will now have to pay the taxes on the income that was never really distributed.
So, transferring assets into a limited partnership, is an excellent way to safeguard your property.