Creating a FLP to place a barrier between business and personal assets.

• Author: Ellentuck, Albert B.
• Position: Family limited partnership

Facts: John Clark, age 55, recently resigned as an executive for a computer company. His net worth is approximately $10 million, $8 million of which is not exempt from creditors' claims. He wants to establish a chain of gasoline superstations (i.e., gasoline stations with attached grocery stores). He plans to invest approximately $1 million of his own funds and borrow $1 million to open the first superstation.

John wants to protect his (1) personal assets from liabilities resulting from the superstations' operation and (2) newly formed business venture from potential claims of personal creditors. While neither John's wife, June, nor their two children (ages 25 and 28) will be officers or employees of the business, the couple Wants the children to own the business someday. They want to start transferring ownership of the business to the children, yet retain control of the business's operations. Issue: Can John use a family limited partnership (FLP) to place a barrier between his personal assets and his newly formed (and somewhat risky) business venture?

Analysis

The tax adviser first sits down with John to discuss his motives for seeking asset-protection planning. The adviser's objective is to preliminarily determine that John's desire to protect assets is not a blatant attempt to defraud creditors or further illegal activity. A detailed fraudulent-transfer analysis should be completed before implementing the chosen strategy. Transfers made with the intent to hinder creditors may be voided if challenged in court.

Assuming the adviser is satisfied that asset-protection planning can be accomplished without making fraudulent transfers, he or she should begin examining the various strategies available to protect John's assets, including purchasing insurance, retitling property to transfer the ownership of nonexempt property to other family members, and taking full advantage of the available state and Federal property exemptions (e.g., state homestead rules and Employee Retirement Income Security Act of 1974 protection of qualified retirement plan assets). More complex strategies (e.g., establishing a FLP or domestic or offshore trust) should be considered when simpler strategies are inadequate and the client has the desire and financial resources to implement such tools.

Further, when evaluating appropriate strategies, the tax adviser should consider John's risk exposure. In this case, John has substantial risk exposure, due to his new business...