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Among the tools commonly used for a variety of asset protection and estate planning purposes is the familiar “limited partnership” commonly referred to as a “family limited partnership.”
Among the tools commonly used for a variety of asset protection and estate planning purposes is the familiar “limited partnership” commonly referred to as a “family limited partnership.” The prefixes may vary depending on the lawyer who drafted it, but the core legal strategy is similar between most. Like any tool, the limited partnership has specific uses that it is best suited for and it must be used with formality and guidance. As it is often and increasingly prescribed to doctors in light of currently liability concerns and looming estate tax changes, I thought basic a primer on its effective and use and maintenance was crucial at this time.
What Is It?
In the simplest view, a limited partnership is a legal entity that can be formed by two or more people in most jurisdictions for just about any legal business purpose. It typically has two classes of members, the first being “general”. Those with general partnership interests typically have management roles and direct liability for the partnership and its activities. The other classes of members are referred to as “limited” and these partners typically do not carry liability for the actions of the limited partnership nor do they usually have management authority. Most importantly, if property drafted and established in the right jurisdiction, the partnership can be funded with assets that are immune to the non-related actions and liability of any of the individual partners.
It is vital to note that these are just common examples of how these entities can be constructed and it is possible to draft provisions that are far more lax or onerous for either class of members into the operating agreement if the parties agree. Therefore, you must know exactly what you are signing and always have legal counsel review it or draft it with your specific purpose and fiduciary interests in mind. Relying on kits, document preparers, and form documents that you sign relying on general rules like those I cite above can be financially fatal.
Where Should It Be Created?
Contrary to popular belief there are no real magic bullet jurisdictions in the U.S. that deliver the unicorn of secrecy, huge tax advantages, and bulletproof asset protection, regardless of what advertisers may lead you top believe. It is absolutely true that some jurisdictions are better than others, however, that very subjective judgment and ranking for me is based on factors including:
• A state’s law and the specific protection it provides, i.e charging orders
• The case law of the state and the climate of its courts
• The fees, costs, and taxes associated with doing business in that state
• Any logical nexus, if possible, between a particular jurisdiction and the business being conducted.
It does not always need to be in the state in which you live or even where you do business if it is validly formed under that jurisdiction’s laws and compliant with all required formalities.
What Does It Protect?
The limited partnership has been used for just about any imaginable business purpose but our discussion here involves how it is most commonly used for physicians: as a family investment management vehicle that can legally segregate long-term investment assets from the family’s assorted personal and professional liability and create options for wealth transfer and estate planning.
My primary use centers on cash and non-qualified cash equivalents like stocks, bonds, CDs, as well as other valuable personal property like collections of investment grade, art, jewelry, collector cars, etc., that have real long-term investment value and potential. We often also elect to have the limited partnership own the client’s personal interests in revenue-generating entities such as LLCs that own investment real estate of various types, as just one specific example.
Items that we routinely exclude (or have to amend bad pre-existing planning to exclude) typically include: personal vehicles, directly held liability producing assets, directly held liability producing businesses, and various real estate including personal residences.
It simply is not an infinitely elastic bag that will hold anything you can figure out how to put into and using it as such can be disastrous for a variety of tax and legal reasons. Next week we’ll start a specific checklist of management issues that will help you run your existing partnership in a more safe and predictable way.
As always, nothing in a column for general readership, even by physicians, is or can be specific to you. Make sure you get professional legal help in examining these options today.
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