South Florida Hospital News
Tuesday May 18, 2021
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November 2004 - Volume 1 - Issue 4
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Limited Partnerships: Foundation of a Wealth Preservation Plan

Unfortunately, any practicing physician today must consider asset protection and wealth preservation planning. With the rising incidents of malpractice actions and the higher dollar values of said claims, protecting assets is critical. While life insurance and annuities are excellent protective devices and are statutorily and judicially protected, physicians also wish to invest in other enterprises, including stocks, bonds, real estate and businesses. The best method to protect these assets is through the use of Limited Partnerships, often called Family Limited Partnerships ("FLP").

The FLP separates the control of the partnership assets from the financial interest in the partnership assets. It is generally set up with a Limited Liability Company ("LLC"), owned by family members, as the "General Partner" and the remaining family members, or trusts for their benefit, as "Limited Partners." This allows the General Partner to actively manage the partnership assets, while the Limited Partners enjoy the beneficial ownership of the partnership assets. The General Partner will have liability for all of the FLP's debts (but not for the debts of individual Limited Partners). However, because the General Partner is an LLC, there is no personal liability to the owners of the General Partner.

Assume a family consists of a husband, who is a physician, wife and several children, with the physician alone having exposure to the claims of creditors. The LLC, serving as General Partner, may be owned by the husband and wife, individually or jointly, or by a trust with wife or others as trustee. The Limited Partners may consist of the husband and wife (owned in trusts or as tenants by the entireties), the children and/or an Irrevocable Trust for the children's benefit. The partnership is taxed as a pass through entity, which taxes the partners on the income of the partnership, with no tax payable at the partnership level.

When properly structured, a partner's assets in a FLP may be protected from his creditors. Generally, a creditor may attach a Limited Partner's interest in the partnership, but such attachment only allows the creditor a right to distributions from the partnership to the debtor Limited Partner. The distributions are controlled by the General Partner, which is controlled by the family. There is no right to "liquidate" the Limited Partner's interest to satisfy the debt. Moreover, the creditor may neither foreclose the Limited Partner's interest, nor participate in the management of the partnership. In order to levy on (i.e. attach) a limited partnership interest in Florida, a creditor must resort to a cumbersome, expensive, and time consuming proceeding called a "proceeding supplementary to execution", which involves a "mini-trial" to establish that creditor's right to a "charging lien" on the limited partnership interest. Additionally, there is an IRS ruling that states that if a creditor perfects a charging lien, the creditor must recognize the taxable income earned in the partnership and must pay taxes on their interest even if they have received no assets. For these reasons, most creditors will not pursue the charging lien.

The final benefit available through use of a FLP is the ability to "freeze" the value of your estate. Once the Partnership is established and assets have been transferred to the Partnership, Limited Partnership Units are then transferred to chosen family members via the use of trusts. A transfer of a Partnership interest to descendants is best accomplished by gift (or sale) of limited Partnership interests to a Trustee, IN TRUST, for the benefit of the descendants. Due to restrictions contained in the partnership agreement and lack of marketability of its units, the value of the units are significantly less valuable than the value of the underlying assets. Therefore, the units can be transferred at reduced value to family members and will reduce estate and gift taxes.

FLPs are an excellent vehicle to own assets of an individual or family seeking creditor protection, estate planning and allows the investment in assets other than life insurance and annuities. Anyone interested in diversifying in a protective manner should consider these techniques.

Stuart R. Morris, CPA, Esq., principal of the Law Offices of Stuart R. Morris, P.A., can be reached at (561) 750-3850, (800) 353-3752 or SMorris@Law-Morris.com You can also visit their website of www.Law-Morris.com
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