          
          
          
          
            Using a Family Partnership to Lower Taxes on Your Investments
          
          
               One of the most versatile and powerful tools in
          the ongoing struggle to save taxes and protect your
          wealth from frivolous or vengeful lawsuits -- not to
          mention absurd liability claims -- is the family
          limited partnership (FLP).  One common use of FLPs is
          to reduce your income tax liability.  As an estate
          planning vehicle, FLPs can also help you avoid
          inheritance taxes.
               As an asset protection vehicle, FLPs combine the
          best of both worlds; they allow you to keep 100%
          control of your assets while at the same time placing
          them beyond the reach of creditors.  Although usually
          used by Americans, for foreign investors with U.S.
          assets or business, a U.S. limited partnership might be
          the first line of defense against exposure to the
          lawsuit-happy legal environment in the U.S.  Even if a
          creditor wins a judgment against you, he may not be
          able to collect a dime from your partnership interest -
          - a fact that is inclined to make even the most
          pugnacious adversaries eager to settle.
               We'll outline how to use a FLP to achieve each of
          these advantages in due course.  But first, let's
          establish exactly what we mean by a family limited
          partnership.  A partnership is merely an association of
          two or more persons (or other legal entities, such as
          corporations or trusts) in some kind of joint venture.
               According to Section 761 of the U.S. Internal
          Revenue Code, a partnership is "a syndicate, group,
          pool, joint venture, business, or other unincorporated
          organization through or by means of which any business,
          financial operation, or venture is carried on..."  In a
          limited partnership, there are two kinds of
          participants -- general partners and limited partners.
               The general partners have management and control
          of the partnership's assets and activities.  And they
          are liable for any debts or claims against the
          partnership.  Limited partners generally have no say in
          the running of the partnership's affairs, and they have
          absolutely no personal liability.
               A typical FLP might have a husband and wife with a
          general partnership interest of perhaps 10% and
          children (and perhaps relatives) with limited
          partnership interests totaling 90%.  Such an FLP might
          contain the family business, or other assets.  Note
          that in this example, the husband and wife, as general
          partners, maintain 100% control of the FLP, despite
          owning only 10% of it.
          
          Income and estate tax benefits
          
               For tax purposes, income earned by a FLP is
          reportable on the individual income tax returns of the
          partners.  (Usually income is allocated among partners
          according to the fraction of their partnership
          interest.)  This means that you can use the FLP to
          spread the tax liability for family business among
          family members -- such as minor children -- who will be
          in a lower tax bracket.
               FLPs can also be used as a simple means of giving
          the family assets to children in small amounts in order
          to avoid inheritance taxes.  In this case, the FLP
          would initially be set up with the husband and wife
          having both a general partnership interest of 10% and a
          limited partnership interest of 90%.
               Each year these parents could give a fraction of
          their limited partnership interest to their children
          (and heirs).  Each parent can give $10,000 of their
          limited partnership interest to each child every year
          without incurring any U.S. gift tax liability.
               In this way, the parents' taxable estate can be
          substantially reduced over a period of years.  What's
          more, even though they may have given away 90% interest
          to their children, as general partners, they enjoy
          complete control of all FLP assets.
          
          
          Asset protection
          
               Suppose you are sued, and a creditor wins a
          judgment against you.  Suppose further that you have
          your home and other major assets in a FLP.  In general,
          a limited partnership may not be dissolved simply
          because one partner is sued.  In most jurisdictions, a
          creditor cannot touch any of the partnership assets. 
          At best, he can hope to obtain something known as a
          "charging order" against your partnership interest. 
          This will entitle him only to any distributions you
          would receive as a general or a limited partner.
               However, you remain the general partner despite
          the judgment.  This means that when and if any
          distributions are ever paid out to partners remains
          entirely under your control.  As you can imagine, a
          creditor armed with a charging order, waiting for you
          to declare a distribution, may have to wait a very long
          time indeed.
               Furthermore, the fact that you have a creditor
          looking over your shoulder doesn't mean you can't
          continue to enjoy the benefits of the FLP.  For
          example, general partners often receive a salary for
          their services to the partnership.  You can also
          receive advances or loans from the FLP.
               You just can't receive any benefit that might be
          classified as a distribution.  For this reason, having
          your assets in an FLP may make you a much less likely
          target for a lawsuit in the first place.
               One word of caution:  What we have discussed so
          far is the asset protection afforded by a FLP to
          someone who is sued as an individual.  If he has his
          assets in an FLP, he will enjoy the benefits we have
          described.  However, it is important to keep in mind
          that you as an individual are not the only potential
          victim of a lawsuit.  Your FLP itself could also be
          sued.
               For example, suppose the family business is
          organized as a limited partnership and the business is
          sued for malpractice or breach of contract.  If the FLP
          itself loses in court, then the charging order concept
          does not apply -- and all of its assets are available
          to creditors for attachment.
               For this reason, it is often wise to divide assets
          with liability exposure among several partnerships or
          corporations.  For example, many taxi companies
          establish a separate corporation for every single
          vehicle.  That way, a judgment against one part of the
          business need not necessarily imperil all the others.
               Accordingly, the most effective asset protection
          scheme will almost always make use of several of the
          structures available -- such as corporations, foreign
          corporations, and foreign trusts.  It is indeed
          possible to make your financial defenses truly
          impregnable.  
               Remember, too, as you read the following sections,
          that your investments can be further protected by
          various combinations of family limited partnerships and
          trusts, depending upon your individual needs.  Not
          every investment needs to be placed in your personal
          name -- and since the FLP is tax neutral, or even
          offers tax savings, it may be an ideal vehicle for
          making some of these investments.
          
          Asset protection and tax savings
          
               While it is very nice to save on estate taxes,
          most would be much more interested in saving taxes this
          year, right now while you are still alive.  The "estate
          plan", when properly implemented has the delightful
          side effect of making excellent use of your children
          before they thought they could, or were inclined to be,
          helpful.  Remember that children over the age of 14
          have their very own tax brackets which start at 0% and
          linger at 15% for a time or so, just as yours did, and
          only after more income than they will make or than you
          need to give them for their support jump up to the
          higher tax brackets.  It is possible, especially for
          the self-employed,to cut the total tax bite in half by
          simply spreading the tax liability among family
          members.
               At this point you say, "Now just a minute, I know
          what you are about to say, and I assure you that giving
          assets or income to my children at this stage of their
          teenage lives is a type of suicide that I do not
          contemplate."  You are right!  Let me assure you that
          no one is foolish enough to suggest that any assets or
          income should be put under the "control" of children,
          who at the age of 16 think that a 944 Porsche turbo
          something or other is an appropriate investment.
               The Family Limited Partnerships, and Children's
          Trusts allow income to be attributed to the children's
          tax brackets while leaving the "control" and "use" to
          more responsible parties.  In the case of the Family
          Limited Partnership, the more responsible party would
          be you.  In the case of the Children's Trust, that
          person would be a trusted other.  However, the children
          and their guardians, and once again, you, would be able
          to have lower tax bracketed dollars available for
          luxuries such as family trips, piano lessons, math
          camp, private schools, college, medical school, etc.
               Consider this:  Mr. and Mrs. Business Partners set
          up a Children's Trust for their children and funded it
          with real estate in which their business was housed. 
          The kids wanted the building to be a retail space
          suitable for an ice cream parlor, but since they were
          not in charge of the decisions, the building purchased
          was an 80,000 square foot steel and block industrial
          building suitable for the parent's manufacturing
          business.
               The business, which had a good profit picture and
          cash flow, paid rent to the Children's Trust, thereby
          writing off the lease payments at a higher tax bracket
          than the children's tax bracket and accepting the
          payments in the lower children's bracket.  Tax savings
          were realized each year.  In addition, Mr. and Mrs.
          Business Partners suggest to the Children's Trust,
          that, with the profits from the lease, it could buy
          office equipment which it could lease to the business
          on a "one year renewable lease" for market lease
          payments, i.e., 75% of the value of the equipment each
          year.  More tax savings were realized.
               It is only incidental to this discussion on the
          advantages of the "estate plan" to mention that when
          Mr. and Mrs. Business Partners went out of business
          because the widgets which the parents were
          manufacturing were replaced by a new super duper better
          thing, the Children's Trust survived the parent's
          bankruptcy and with the appreciated value of the real
          estate and value of the still owned equipment, sold its
          assets and loaned Mr. and Mrs. Business Partners
          $500,000.00 to start a new business.
               The above examples are illustrative of the old
          adage, "divide and conquer."  If they only file a joint
          return, no married couple will ever get ahead tax wise. 
          If through a proper estate plan additional entities are
          created the serve the dual purpose of providing lawsuit
          and asset protection while dividing income into lower
          tax brackets.  Creating additional entities does itself
          provide a record keeping and filing burden. It is bad
          enough facing April 15th each year with one
          incomprehensible form!  However, if you are unwilling
          to pay attention to the details there are others who
          will do it for a fee.  Failure to care may result in
          exposure to judgments and the possible greater burden
          of "starting over."
               One major caution must be mentioned, as some of
          these asset protection techniques are taking on aspects
          of a fad.  The courts can set aside a transaction on
          the basis that it is a sham, despite what your fancy
          paperwork says.  A family limited partnership formed on
          the eve of a judgment, with no business purpose and no
          purpose other than evading the creditor, is likely to
          be set aside by the court.  The same is true of trust
          arrangements made in the same way. 
               These problems can be avoided by making such
          arrangements in advance, having sound and proper
          purposes other than avoiding ones just debts, and to
          some extent using foreign jurisdictions to make seizure
          more difficult.
               It is important to stress that there are no "magic
          bullets" in asset protection, and there is no instant
          solution.  Setting up an asset protection plan --
          whether it be partnerships, offshore trusts, domestic
          trusts, or some combination, requires expert advice.
          
          
          Preparing your asset protection plan
          
               One of the best ways to protect yourself is to
          have professionals prepare an asset protection plan in
          advance of any problems.  In the process of doing so,
          many people are discovering that they can eliminate
          most income taxes through the proper use of family
          limited partnerships, offshore trusts, corporations,
          and annuities.  
               Creating an asset protection plan is not
          expensive, and provides a great deal of assurance that
          you and your family will have the benefit of the money
          you have built up through years of work.  Asset
          protection plans are a relatively new area of law,
          prepared by lawyers who specialize in protecting what
          you own instead of in suing people.
               Asset protection is different from traditional
          retirement or estate planning.  It is the systematic
          and integrated protection of your family and business
          from risk.
               Most financial planning is intended to help you
          establish wealth so you can retire, and pass on as much
          of that wealth as possible to your family after death.
               Asset protection plans include estate plans but
          are intended to also help you keep your wealth while
          you are living.  They often involve legal structures
          such as family limited partnerships, children's trusts,
          exempt assets, offshore trust arrangements and living
          trusts.
               Asset protection plans are fully legal.  It is not
          something for people who might want to avoid the law or
          their responsibilities.  The law is clear as to what is
          permissible and what is not.  Asset protection simply
          gives protection against unfair lawsuits and gives a
          level playing field to operate from.
               The goal is to structure the plan so you never
          have to misrepresent yourself or worry about the
          legality of the plan.
               The best way to do this is to seek the assistance
          of professionals, and there is now a firm that works
          with clients from all over the country.  They can also
          work with your existing lawyers or accountants if you
          wish.  For an information package please write: Asset
          Protection Corporation, Suite 201A, 14418 Old Mill
          Road, Upper Marlboro, Maryland 20772. 
               The family limited partnership approach can be
          used in conjunction with the corporation strategy
          mentioned in the previous chapter, by having the family
          limited partnership own the corporation.
          
          
          
          
