Family Partnership

Can the FLP protect family members from creditors (including ex-spouses)?

If you or some other family member are unable to satisfy your future creditor, that future creditor’s only remedy against the partnership is the right to receive a "charging order" against that member’s partnership interest. Assuming there has not been a fraudulent conveyance, the creditor may not reach partnership assets. While the charging order does allow the creditor to reach income, the assets are safe.

Additionally, the FLP can be drafted to provide that an involuntary transfer to a creditor (or any other outside person) is not permissible and that the transferred interest is to be purchased by the partnership at its fair market value (frequently much less than the underlying asset value). An ex or divorcing spouse would receive the same treatment provided the partnership interest is the separate property of the family member.

Continuing this example, if you wish to use your unified credit to shelter the gift tax on gifts of partnership interests in excess of your annual exclusion amount over $1 million in partnership interests could be transferred without exceeding the $1 million amount sheltered from tax by maximum credit.

The restrictions on transfer likewise deter an irresponsible family member from wasting family assets.