Asset Protection Strategies for New Jersey Families

If you have significant investments, real estate holdings or business interests that you wish to remain in your family following your death, one way to accomplish your goal is to create a family limited partnership (FLP) or family limited liability company (FLLC). These entities can be very useful, but their creation is highly complex, so consult with an experienced lawyer if you are considering this as part of your estate planning or business strategy.

A. Schancupp & Associates, L.L.C., is a law firm dedicated to helping clients create effective estate plans in Essex County, Morris County and throughout New Jersey. Arnold Schancupp, our founding attorney, has decades of legal experience in estate planning and tax law. Under his leadership, the firm advises clients on the benefits and drawbacks of family limited partnerships and LLCs, and assists in the creation and maintenance of these entities.

What Is a Family Limited Partnership?

FLPs and LLCs (used interchangeably here) are legal entities created by a person with assets he or she wants to pass on to children. The entity is funded when the person transfers investments, real estate or other assets to the FLP.

How Does It Work?

A family limited partnership has general partners and limited partners. Usually, the preferred method of structuring the partners is to create a limited liability company owned by the client’s children. This LLC becomes the general partner in the FLP and owns 1 percent of the FLP’s equity. The client who funds the FLP retains 99 percent of the equity but is considered a limited partner.

What are the effects of becoming a limited partner?

  • Limited partners essentially give up the right to manage their assets. The general partners (i.e., your children) take over that responsibility.
  • In exchange for giving up that right, the creator/limited partner of the FLP getsprotection from creditors. If a creditor gets a judgment against the creator, the creditor only gets a “charging interest.” Without getting too technical, that means the creator/limited partner will not have to pay the judgment unless the general partners of the FLP authorize a monetary distribution to the creator. This is an effective method of asset protection.

Estate Planning and Tax Benefits of Family Limited Partnerships

An FLP allows gifts to be made to family members at discounted values. Because the creator of the FLP is a limited partner who has only a limited partnership interest, he or she has little to no say in the way the FLP is managed or how cash flows. That means the value of the limited partnership interest itself is minimal compared to the amount of assets involved. When the FLP creator dies, A. Schancupp & Associates, L.L.C., can fight to have this discount applied to the estate, which can save up to about 25 percent in estate and gift taxes. This is called a “valuation discount” in estate planning.