Law Offices - Kenneth D. Sisco, Attorney - Personal Information
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CLICK HERE for The Ultimate Asset Protection Tool The ultimate strategy for utilizing foreign trusts, foreign corporations, private annuities, limited partnerships and more.Reduced Fees for Foreign Planning -- If you are interested in Foreign Trusts, Foreign Corporations, or foreign planning and strategies in general, and you are in a position to take action before August 15, 2008, you will be pleased to note that I am prepared to offer substantial fee reductions for foreign planning prior to that date. Please see Announcement |
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Family Limited PartnershipsFOR ESTATE PLANNING AND ASSET PROTECTIONBEFORE YOU SPEND THOUSANDS OF DOLLARS ESTABLISHING A LIMITED PARTNERSHIP CLICK HERE What Is a Family Limited Partnership? The common law definition of a partnership is an association of persons who join together their money, goods, labor or skill for conducting a trade or business and sharing the profits and losses from it. This definition describes a General Partnership as opposed to a Limited Partnership. In a general partnership, all the partners are general partners. Typically, except as otherwise established by agreement, they all have equal say in the running of the business, and they all have unlimited liability for the debts of the partnership. A Limited Partnership, on the other hand, has one or more General Partners who control the day to day activities of the business and have unlimited liability for the debts of the partnership; but it is also composed of at least one Limited Partner, who has no say whatsoever in the day to day activities of the business, and whose liability is limited to his investment in the partnership. What Are the Benefits of a Family Limited Partnership?There are countless benefits to be derived from the use of a Family Limited Partnership, depending on the individual circumstances of each person that takes such a step. Not the least of which, is the simple fact that when they put their family affairs on a business footing, they are much more in tune with what is actually going on in their lives, and conduct their affairs with a great deal more efficiency. The most common objectives for establishing a Limited Partnership are Asset Protection, Estate Planning and Income Tax Savings. A. Asset ProtectionThere is nothing new in the concept of limited partnerships. They have
been used since the turn of the century to provide protection for investors
in a business venture, by limiting liability to the investment itself. What
is new, is the use of these structures to actually protect property of the
limited partners. The best that a creditor of an individual partner may do, is obtain a charging order against the partnership, which in effect would order the partnership to turn over to the creditor any distribution that would otherwise be due to the partner. The charging order affects only distributions, however, and if there are no distributions, the creditor will be frustrated. A limited partnership consists of one or more general partners to handle the management and day to day affairs of the partnership, and one or more limited partners, that share in the profit and/or loss of the enterprise, but are not permitted to participate in management decisions. The key to using limited partnerships as an asset protection device, is the provision that the same individual, at the same time, can be both a general partner and a limited partner. The strategy that becomes obvious from these provisions is for two or more persons, to transfer assets to be protected, to a family limited partnership, in return for partnership interest. Typically it is husband and wife that take advantage of this strategy, but it need not be. Siblings, parent and child, or any two or more persons who feel comfortable combining their assets for mutual benefit may form a limited partnership. For example, a husband and wife would transfer assets to a limited partnership in exchange for two percent general partnership interest and ninety-eight percent limited partnership interest. The husband and wife would have two percent interest as general partners, but one hundred percent control over the assets. They would have ninety-eight percent interest as limited partners, but as limited partners they would have no control over the assets and would have no voice in the running of the business. Now, in the event a crook backs into wife at an intersection, claims whip lash and gets a judgment against wife for one million dollars, assets in the limited partnership are protected, because wife doesn't own anything except an interest in a limited partnership. As mentioned above, the best the judgment creditor could get against the wife, is a charging order from the court, directing that if there are any distributions from the partnership, that distribution must be turned over to the creditor. Actually, protection begins long before suit is even filed. Before filing suit against the wife, chances are the attorney thinking about taking on the case will run a check on wife's financial condition. When he finds that she has no assets, unless he derives some perverse joy from wasting his time, he most likely will pass on the case. It is important to note, however, that if it is the partnership itself that creates the liability and any judgment will be against the partnership itself, the assets could be reachable. For example, if the car driven by wife above, is owned by the partnership, the partnership might be liable. Accordingly, it is prudent to exclude high liability assets from the partnership, and in some cases to divide assets, placing them in more than one partnership. As a further example, if one owns a toxic waste dump, it would not be wise to put that property in the same partnership along with his home. B. Estate Planning.In addition to asset protection, the family partnership offers some wonderful estate planning opportunities as well. For example, suppose a husband and wife with two children, have assets with a fair market value of $1,600,000. Even if the assets are in a properly drawn Revocable Living Trust, if the parents pass away under these circumstances, there will be estate taxes to be paid on $400,000, that is approximately $173,000. What happens if the parents put their $1.6 million into a Family Limited Partnership and then transfer the limited partnership interest into a properly drawn Revocable Living Trust? If they pass away at precisely that moment, there would be no difference. However, each of the parents can give each of the children $10,000 of limited partnership interest, each year, without any gift tax consequences, and without affecting the parents' $600,000 exclusion. In the first year, moments after setting up the limited partnership, they can reduce their taxable estate by $40,000. If they were to die at that moment they would save $18,000 in estate taxes. Assuming the assets did not appreciate in value, in ten years all the limited partnership interests in excess of $1.2 million would belong to the children, but the parents would retain 100 percent control over the use and disposition of those assets!!! Two very important estate planning objectives will have been achieved. First, the parents' estates are reduced by the amount of the annual gifts, thereby reducing estate taxes and also reducing the cost of administering the estate. Second, perhaps an even more important consideration, if the assets of the limited partnership are appreciating, they will appreciate in the estate of the children, rather than in the estate of the parents. That will further reduce the relative size of the estate, and therefore the estate tax and the cost of estate administration. C. Income Tax SavingsUntil recently, before the imposition of the Now with the new law and higher rates, many very high income taxpayers could very well benefit from a Family Limited Partnership, completely apart from the asset protection and estate planning advantages. For a person earning more than $285,000 per year, the $2,350 personal exemptions are completely phased out. Recovering this one item will pay for the creation of the Family Limited Partnership. But there is a great deal more. To take full advantage, one must make his children fully independent taxpayers. The first step may have already been accomplished for estate planning purposes. That is, by way of $10,000 gifts of limited partnership interests, including income producing assets, income is transferred to the children. Now that they have their own money, they can pay their own living expenses. And if the child is paying more than fifty percent of his support, he can file his own tax return with his own personal exemption and his own standard deduction of $3,700. Perhaps it can't be done the first year, but suppose eventually, the parent transfers limited partnership interests that produce $20,000 in annual income to each of his two children, his mother, and his father-in-law. After taking the standard deduction and personal exemption, each will have income of no more than $13,950. The seniors will most likely have extra personal exemptions and will have even less income subject to tax. On income of $14,000 the tax is about $2,000; or $8,000 for all four. On the other hand, tax on $80,000, at the top rate, would be more than $30,000. The family unit is more than $20,000 richer, and presumably a great deal happier. CLICK HERE For The Cost Of Establishing a Limited Partnership Copyright ©1996 |
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