By Asher Rubinstein, JD, Guest Writer
For doctors practicing in the United States, the unfortunate reality is that a lawsuit is not only likely, it is inevitable. Doctors are viewed as “deep pocket” targets, and there are many plaintiffs’ attorneys who are eager to file medical malpractice claims on a contingency basis, with no risk to their clients. Doctors are intelligent and accomplished professionals, but the smartest may be those who protect their assets well before the malpractice claims arise, even as early as upon graduating from medical school.
Using a Family Limited Partnership (FLP) for Asset Protection
For most doctors, the Family Limited Partnership (FLP) is the most beneficial domestic structure available for asset protection, as well as estate planning and tax minimization benefits. By transferring assets to FLPs, doctors can legally and successfully protect these assets from attack by future creditors, as well as preserve the assets for their family, rather than the IRS.
Asset protection is the safeguarding of personal wealth from attack by future creditors. The assets that may be protected include homes, interests in medical practices, other business interests, investment real estate, intellectual property (including patents, books, etc.), vacation homes, cash, bank accounts, brokerage accounts, stocks, bonds, cars, boats, jewelry, art, wine, and other collections and investments.
The asset protection of an FLP is statutory, meaning that it has been codified as law by state legislatures. The Revised Uniform Limited Partnership Act (RULPA) has been adopted in all 50 states and provides that the assets owned by a limited partnership are not owned by the individual partners. Therefore, those assets cannot be attached by the personal creditors of an FLP partner (the doctor). If a person contributes assets to an FLP, those assets are no longer owned by that person (although, as explained below, the person may still control those assets). A creditor may not seize those assets merely because the creditor may have a judgment against a partner of the FLP.
You Can Control Everything but Own Nothing
A family limited partnership is, by definition, a joint venture between family members. The partnership is comprised of both general and limited partners. Typically, spouses are the general partners. The general partners control the partnership and the disposition of the assets within the partnership. The general partners decide and implement all decisions of the partnership, such as whether to buy or sell an asset in the partnership, what investments the partnership should make, and whether to make a distribution of profits from the partnership to the partners. The general partners control the assets in the FLP and make the decisions regarding those assets, just as they did before the FLP, when they owned the assets in their personal names. Although they transferred legal ownership or “title” to those assets to the FLP, they retained control by virtue of their general partnership interests. The limited partners in the FLP are similar to “silent” partners or passive investors, without a voice in the affairs of the FLP.
Limited partners have equity interests in the partnership, but they have no decision making authority over the partnership or the assets owned by the FLP. Limited partners are not entitled to demand distributions from the FLP. Limited partners may not sell or assign their partnership interests without the consent of the general partners, nor force the liquidation of the FLP. The general partners are in complete control of the FLP, although they do not own the assets in the FLP.
Practice Point: Structure the Asset Protection Plan by Segregating High-Risk Assets
Successful physicians typically have varied multiple assets–homes, investments, real estate, business interests, equity in their practices, intellectual property from patents to books, bank accounts, brokerage accounts, and a great many collections and toys.
A solid asset protection plan would begin with an inventory of the assets. Each asset should be examined individually and evaluated for the likelihood of being attacked, based on the chances that the asset would generate a liability. Thus, a rental property should be owned by its own parent entity (an FLP or an LLC) so as to limit the creditor threat (i.e., from a tenant) to that entity alone. Each rental property should be owned by a separate FLP. The reason for treating each real estate asset individually and placing each one in its own FLP is to minimize the litigation exposure of each asset.
In general, high-risk assets or those prone to litigation, such as rental property, should be kept separate from low-risk assets, like bank and brokerage accounts. One's home should be owned by a separate FLP. One’s medical practice should be registered as a professional corporation. The stock of the professional corporation should be owned by another FLP. A physician’s assets may thus be protected from each other and from any future personal attack against the physician.
Plaintiffs’ lawyers are frequently deterred from taking a case against a doctor when they learn that the target doctor has no attachable assets. They are usually better off taking the insurance company’s offer, rather than litigating with a slim chance of collecting. There is little sense in litigating when even if they get a judgment from the court, the judgment is uncollectible.
If a patient refuses to settle, pursues the lawsuit and wins a judgment, the patient is limited to a “charging order.” A charging order is a type of lien that entitles the judgment creditor to receive the judgment debtor’s share of any distribution of funds made by the FLP. The judgment creditor is not entitled to take the assets owned by the FLP. Distributions are made in the sole and absolute discretion of the general partners. The general partners may determine not to distribute. There is IRS precedent which obligates the judgment creditor with the charging order to pay tax on the distribution that it may never receive. This is yet another incentive for the plaintiff to settle.
Fraudulent Conveyances: Set Up Your Asset Protection Plan Long Before Claims Arise
It should be noted that the establishment of an asset protection plan solely to protect assets from pre-existing creditors may be construed as an improper attempt to hinder such creditors. Pre-existing creditors include a patient who has already filed a lawsuit, as well as a patient who has been injured but hasn’t yet filed a lawsuit. Such a creditor may challenge an FLP plan as having been established fraudulently, for the specific purpose of evading debts due to that creditor.
Thus, doctors should establish their asset protection plan long before any claims arise. It is never too early to anticipate the threat from a future patient and protect against that threat ahead of time.
Moreover, it is important to implement an FLP plan as part of a complete estate and tax planning. Readers of The White Coat Investor already know about integrated planning: tax planning, insurance planning, retirement planning, estate planning and asset protection planning. If the FLP plan is included as part of a comprehensive tax, estate, and financial plan, creditors will have far less likelihood of successfully arguing that the FLPs were established solely to avoid creditors. Indeed, there are excellent tax, estate planning and family succession benefits to FLPs.
Additional Benefits of Family Limited Partnerships: Succession Planning and Minimization of Estate Taxes
FLPs save estate taxes and accomplish succession planning by the combination of (a) discounting the value of limited partnership interests, and (b) gifting the discounted limited partnership interests to family members. The two principals work together. First, the value of a limited interest in the FLP is discounted, due to certain FLP realities recognized by the IRS. Once discounted, more limited partnership interests can be gifted tax-free to the next generation, which results in more assets passing out of the doctor's taxable estate. The doctor’s general partnership interest is retained and not given away, which is how the doctor continues to administer and control the FLP and its assets, even while the doctor may have gifted all of his or her limited partnership interests.
The principal of discounting recognizes two inherent reductions in the value of a limited interest in a family limited partnership. One reduction in value is due to the fact that a limited interest in an FLP is a non-controlling interest in a family enterprise. A purchaser of such a limited interest would be an outsider, would have no right to control the FLP, nor expect any distributions from the FLP (unless the general partner decided to make a distribution or unless all general partners died and the FLP liquidated).
A second discount in FLP value is due to the fact that, unlike publicly traded stocks or other securities, there is no ready market for the purchase and sale of limited interests in a family limited partnership, and therefore no liquidity. The IRS routinely accepts discounts in values of limited interests in FLPs varying from 30% to as high as 50%, depending, among other things, on the liquidity of the FLP's assets, the likelihood of a distribution or liquidation and the profitability of the FLP.
It is important to understand that the discount applies to the value of the limited partnership interest; the value of the asset held in the FLP remains the same. After discounted gifting of their limited partnership interests, while keeping each of their 1% general partnership interests, a couple can remove 98% of the value of their estate. In addition, future appreciation of the value of the limited partnership interests given to the children will be excluded from their taxable estate.
Discounted, or leveraged, gifting of FLP interests is in addition to annual gifting of FLP interests valued up to $15,000 to any person (usually children), tax-free.
Doctors may thus achieve minimization of estate taxes and preservation of family wealth for one’s heirs, while at the same time controlling those assets, efficiently and completely via FLPs. FLPs also allow for income tax minimization through the concept of “income spreading.” If children are limited partners, distributions from the FLP to limited partners may be taxed at the children’s lower tax rates.
Family Limited Partnerships can be tremendously useful to doctors to achieve wealth preservation goals. Foremost, doctors may protect assets from future litigants and creditors and discourage a variety of potentially severe lawsuits. In addition, FLPs may eliminate estate taxes and preserve wealth for children or other beneficiaries rather than paying estate taxes to the IRS. However, timing is important. If FLPs are funded as a response to a pre-existing threat, their effectiveness may be compromised. The best planning is prophylactic and preemptive.
As you accumulate wealth, you need a way to protect your assets. WCI’s newest book is The White Coat Investor's Guide to Asset Protection, and it provides the techniques you can use to safeguard your money AND the most comprehensive list of state-specific asset protection laws ever published. Pick up the book today and protect your wealth!
[Editor's Note: Well, that was an excellent description of the positives of a Family Limited Partnership. Now you're probably wondering why you and everyone else you know doesn't have one, or better yet, three. There's nothing in this article that is untrue, but there are four facts that should be mentioned any time that an advanced asset protection/estate planning technique/product like an FLP is discussed:
- A physician is very unlikely to ever have a judgement above policy limits
- Many of your assets are already protected from creditors
- Under current law, a physician is very unlikely to die with an estate large enough to owe federal estate tax and most states either have no estate tax or an exemption higher than the net worth of most physicians
- FLPs are not free. They require time and money (think $5K-$10K) to set up and maintain. How do you think asset protection attorneys get paid? An FLP is a business. A partnership. Filed a partnership return lately? I have; it wasn't so fun. Also, just like a trust assets have to be transferred in and out. Don't underestimate the hassle factor here. There's a reason the attorney hands you a two inch binder in exchange for your $10K.
Once you know those four facts, it's time to consider how much time, money, and hassle do you want to spend on something you probably aren't going to need? Does it make sense for some docs? Sure. In fact, it may even make sense for me at some point given the success of WCI. But all docs? Not even close. This is also an excellent time to get a second (and even a third) opinion before implementing this strategy.]
What do you think? Do you have an FLP? Why or why not? Do you think you'll get one later? Comment below!
[Editor's Note: Asher Rubinstein is a partner at the law firm of Gallet, Dreyer & Berkey in New York City and provides legal representation to clients on issues including the preservation and protection of assets and private wealth. We have no financial relationship.]
This sounds similar to the idea of renaming your house as owned “tenants by entirety” so that if action is taken against you, the house can’t be involved because it is owned by both you and your spouse completely. Except, that the FLP costs a lot more money.
I am all for asset protection, but have always viewed insurance as gambling. You are paying for something that may or may not happen. If it does happen, then you are paying for that insurance to do its job and protect you. If either A) it doesn’t protect you or B) has a negligible chance of actually happening; then I don’t view the opportunity cost as being worth it.
Most insurance opportunities are driven by the fear of “what if.” We have to do our due diligence to make sure that fear is real first and what the impact would be if that thing we fear actually happened.
I don’t think I’ll be pursuing an FLP. It is an interesting idea, though.
TPP
Insurance is a good way to think of it. For some, it’s worth it, especially if you have an estate tax problem. For the average doc, probably not.
i have an individual investment account with vanguard, the dividends automatically go to a money market account. I feel like I came across something on your site that stated that automatically reinvesting the money market fund would not be wise from a tax perspective. bottom line should i reinvest the money market immediately or should i wait a year to avoid short term cap gain tax?
You don’t need to wait. The only issue with reinvesting dividends in a taxable account is you end up with tons of tiny lots to keep track of. The brokerage technically does it for you and it’s not that big of a deal with computers these days, but it’s typical practice among most investors.
Thanks for your response at the end of the post. After reading through Mr Rubinstein’s points I was wondering why its not standard practice for all docs to have multiple FLPs. In light of your counterpoints, this makes more sense.
Still an interesting idea. I’m in a fairly low risk specialty, and my wife has a good bit of protection built into her contract, but if I were in a high risk specialty in a lawyer friendly state, I might look into this a little more.
-Ray
The whole time I was reading, I thought “that sounds great, but how much does it cost?” Thank you WCI for the pre-emptive answer.
I like TPP’s comparison to insurance – this sounds like a very expensive policy insuring against an unlikely scenario.
I guess it depends on what you have to lose. If you’re running a high risk business and have some estate planning needs and a $20M net worth, then what’s $5-10K for a little insurance? But a doc with a net worth of $2M, 90% of which is in a home protected by tenants by the entirety titling and retirement accounts 100% protected in her state….probably not worth it.
Not all states offer tenants by the entirety, how should those people go about it?
Go about what? Chances are, most people are going to have some assets that are subject to creditors and protected only by insurance. That’s the way our home equity and taxable investing account are.
are there other titling arrangements that protect the house from creditors (since my state doesn’t offer tenancy by the entirety). as an MD, I’ve got malpractice and then an umbrella for now.
Not really, and even to use that one you have to be married.
What are the pros/cons of asset protection within a Family Limited Partnership vs Domestic Asset Protection Trust (only available in some states)?
I’m a spine surgeon starting practice in a couple of months. While I don’t have any assets of value at the moment, I’m definitely interested in an asset protection plan despite the complexities of starting one and maintaining.
The average employed malpractice insurance is $1Mil occurrence/$3Mil Aggregate. This is fine for most specialties, but there was a recent paper from Becker’s Spine that the average decision against a spine surgeon was $4.9 Million, if successful before a jury. Granted, the majority of suits are either dismissed or settled, so this figure is a moot point for a majority of the time. Also, from what I understand most lawsuits name the hospital in addition to the surgeon (or other surgeons, anesthesiologist, etc.) so that large figure may be split among several entities.
Analyzing potential lawsuit scenarios is not the most enjoyable thing to do when starting practice, but I am intrigued by the possibility for peace of mind for the price of $5k or so. My specialty is probably one of the top litigated against, so I feel I need to do my due diligence rather than say “it will never happen to me!”
Thanks.
https://www.beckersspine.com/spine/item/37340-7-trends-in-spine-surgery-malpractice-cases-75-found-in-favor-of-surgeons.html
Sounds like you may be a good candidate for an FLP as soon as you start acquiring significant assets not protected in another way in your state.
“What are the pros/cons of asset protection within a Family Limited Partnership vs Domestic Asset Protection Trust (only available in some states)?”
Brad, domestic asset protection trusts (APTs) will likely run afoul of the Full Faith and Credit Clause of the U.S. Constitution. This clause obligates a court judgment from State A to be honored in State B. So, if a plaintiff obtains a court judgment from, say, a court in New York, and the plaintiff then seeks to enforce that judgment against assets in an asset protection trust in Alaska, Nevada or any of the other states that have implemented APT legislation, that New York judgment should be recognized in the APT state and assets made available to that creditor. There have been a few court cases regarding domestic APTs, and in general, those cases have not been favorable to the trusts. Moreover, the constitutional issue has not been tested. As I ask my clients who are curious about domestic APTs, are they prepared to be the test case? They may not win.
Might be interesting to have a follow-up post about DAPTs. Also, can you speak to the pros/cons of a Family LLC vs a Family LP?
Any time someone starts flinging around “estate tax protection” as a reason to do something, I begin to think they are either out of the loop of current tax law or talking to the 1%. Of which I am neither. Then I tune out. I have set up an LLC, for our prior practice and know about the hoops needed to keep it “legal”… this would be similar and he advocates for multiples of them! Oy vey! The paperwork needed on an annual basis gives me gray hair!
I agree that this not necessary for most docs- although rental real eatate may be an exception, because it exposes you on multiple fronts.
Being “merely 1%” probably isn’t enough to justify it. Lots of docs in that category. Much fewer in the top 0.5% and they’re rarely in the top 0.1% (starts at $1.7M+ in income).
For the sake of argument, what are the pros and cons compared to using trusts versus FLP?
They both have expenses to set up and maintain and have to file returns (although they’re different returns). Both facilitate estate planning. An irrevocable trust is fantastic asset protection since you literally don’t own the assets anymore. A revocable trust provides little asset protection benefits (basically just makes your assets a little harder to see.) I think the partners actually have to be related to do the FLP thing, but I suppose you could do something similar with any limited partnership or even an LLC. I don’t think you get the discount aspect with gifts into a trust, but I could be wrong.
I used a big law estate attorney to set up an irrevocable trust for gifting assets to children and grandchildren. The attorney recommended this approach as better and simpler over a FLP. Do you ready want to be 80 years old trying to keep the FLP in compliance with grown children and in laws? Trust law is mostly settled but not so with FLP and DAPT. The attorney said that DAPT and FLP would not stop a determined creditor. I recommend getting 5m malpractice overcoverage and Officers and directors liability policy for your practice corporation. You can settle almost any lawsuit for 5 m. Consider the malpractice insurance as a cost of business.
Where did you get the $5M coverage and how much did it cost compared to your regular coverage? When I asked about doubling my malpractice coverage, the company’s attorneys laughed and said, “Sure, we’ll take your money” but they didn’t think it was worth the money.
We purchased it from a secondary reinsurance company. It pays only when the primary policy is maxed out. It costed about 25% of the underlying 2m base policy. The underwriters at the primary malpractice carrier referred the reinsurer to us.. Be aware a 5m policy will attract more interest from the tort bar and you may be willing to settle a bad case but the reinsurer will not. It can drag out these bad cases. Pick your poison!
Question: Why not just get a $3M or more umbrella insurance policy? These are usually super cheap and it is my understanding that this would cover you if you have a judgement or settlement that goes above your primary policy.
Every umbrella policy I’ve seen explicitly excludes malpractice liability.
Interesting. Too Pricey though. If I have 2 rental units and a home (300k, 400k & 500k in value) 30k to setup the FLP Makes no financial sense.
Probably right. But imagine a $10M farm.
One other significant implication to keep in mind: if you gift the asset prior to death to an heir (ie: through an FLP or not), then they do not get a step up in basis, however, if you die and they inherit the asset (assuming you are under the estate limits), then they get a step up in basis. This can be a HUGE difference in future taxes when your heir decides to sell the asset—potentially millions of dollars extra dollars paid in capital gains/state taxes. FLPs were much more popular when the estate limits were much lower—everyone was trying to get appreciating assets out of their estates before they hit the limits. Now with the much higher limits, this is much less of an issue for most people.
Excellent point. Hadn’t considered that one.
I have been procrastinating a lot about asset protection as well as estate planning.
The vehicle that I will probably go with is a revocable living trust. Doesn’t offer asset protection like a an irrevocable trust or apparently like a FLP but like white coat said, insurance policies likely would protect me as a claim over my umbrella or malpractice insurance limits is unlikely. This would mainly be to avoid probate in transferring assets upon death.
The cost of an FLP seems prohibitive especially if you are supposed to create one for each asset to isolate them from each other
A revocable trust is a great estate planning move (and we should pretty much all have one before dying) but doesn’t do much for asset protection.
As an intern with significant assets, is this something I should look into? I doubt the cost is worth the cost right now especially considering I am not the captain on the ship at the moment.
I guess it depends on what significant means. I wouldn’t do it for $50K of unprotected assets but I might for $1M of unprotected assets.
I’m at ~750k in assets. I don’t own a house and have no debt of any kind.
Are they protected in another way (like retirement accounts or a house owned as tenants by the entirety)?
Have about 50k in retirement, 50k in liquid assets like cash, and the rest in an LLC which owns commercial real estate.
I am considering an FLP from a slightly different angle and would love any feedback. I have an opportunity to become a Limited Partner in my brother’s Family LLC (he is a high earning physician). The FLLC is invested about 75% Stocks/Bonds and 25% Private Equity. I am not sure of the exact difference between a Family LLC and FLP but I think there are some similarities in how they are used for asset protection, estate planning, etc.. My husband and I have a net worth of $1.3M, and two kids to whom we intend to pass on wealth. While most of it is in qualified accounts, we are looking for investment opportunities that offer diversification into non-correlated investments as all of our current investments (retirement and brokerage) are in the market. We could invest about 300K of our current assets into the Family LLC right away and more over time, which would give us about $75K in private investments. Additionally, I expect to inherit upwards of $3M from my parents (both physicians) when they eventually pass away. I am trying to decide investing is the LLC a good idea.
I see the Pros as 1) investment diversification 2) professional investment team managing a chunk of our portfolio vs our current typical ETF/401k investments (is this really worth it?) 3) estate planning/tax minimization down the road should I receive a large inheritance (Stevie Wonder’s comment above made me think twice about this)
I see the Cons as 1) no control over the investment selections as my brother and his wife are the General Partners 2) Lost flexibility to gift fund shares to charities (we like the tax benefit of this) 3) higher fees (AUM fee of 0.76% + ER fees) 4) cap gains taxes due to fund turnover which we have no control over and I am not sure it will be offset with loss harvesting 5) I would have to take 150K out of our brokerage account to invest in the LLC and pay capital gains on it before ‘reinvesting’ 5) family drama should any issues arise
Other things I am wondering-
1) If the LLC is suddenly dissolved, what are the tax/estate implications?
I agree you should look at this very carefully, including a second opinion. It’s definitely time to meet with an attorney about it for solid professional advice.
Kind of a bummer about the AUM fee though, but at least it’s sub-1%.
I think this article addresses your question well:
https://shenkmanlaw.com/blog/2015/05/31/dissolving-an-flpllc-can-you-have-your-tax-cake-and-eat-it-too/
Thank you so much, that’s a really helpful article. Do you recommend I talk to an Estate Attorney?
I have been following your blog and podcast for about two months and have learned a lot. I also just got the book yesterday and am looking forward to reading it!
I guess I should have added that we are just over 40. By the time we pass away, there’s a high likelihood we will be over the federal estate tax exemption, whatever it is at that time.
Yes. I see you’re in VA, not NY, so you probably don’t want Mr. Rubinstein (the author of this piece), but I’m sure there are plenty of good VA attorneys for you to choose from.
I actually have my taxable investment assets in an FLP. But to put this in context, I am approaching retirement and began practicing in 1990. I was in a community property state with a terrible malpractice climate and the estate tax began at $1M for an individual. Beyond the limits of your retirement plan, there were very few ways to protect your investment assets. Variable annuities were the rage at the time but the assets were locked up until 59.5. FLPs while costly to set up do discourage litigants from pursuing your assets. A judgement against the FLP owner is only entitled to a charging order vs the FLP. If the owner doesn’t make any distributions the holder of the charging order gets nothing but is responsible for their share of the taxes. After tort reform and tax law changes, if I were starting practice today I would not do it. But given the litigenous work environment at the time, I have no regrets.
Funny how a few changes in the laws take something from being very attractive for most docs to being attractive only to very few. It wouldn’t take much of a change in the estate tax exemption to bring all kinds of techniques back to the forefront. A $1M exemption would be a huge boon for estate planning attorneys!
Sure, the increase in the estate tax exemption to $11.2M has resulted in many people, doctors and non-doctors alike, no longer subject to the federal estate tax and thus their estate planning and tax planning needs have changed. From an asset protection perspective, however, doctors are still routine targets of litigation and that has not changed.
Addressing some of the comments:
1. Medical malpractice insurance is of course a first line of defense. However, it is quite common that a malpractice lawsuit seeks damages in excess of the insurance coverage. Just this morning, I met with a doctor who told me that he and his practice group typically have coverage up to $1 million per occurrence, $3 million per year for claims. This is typical coverage. A legal judgment may exceed such coverage. Asset protection works in hand with insurance in the following way: The judgment creditor gets the insurance payment, but is thwarted in reaching any of the doctor’s personal assets to satisfy any deficiency. Doctors should maintain reasonable insurance coverage, and insurance would compensate for an injury; asset protection would be an additional line of defense in the event that a plaintiff seeks to go past the insurance.
2. Yes, many of a doctor’s assets may already be protected under applicable law. For example, retirement funds may already be protected under ERISA, a federal law, as well as state laws. State homestead laws may protect a personal residence. However, such coverage varies from state to state. Florida and Texas have generous homestead exemptions; New York and Connecticut, less so. An asset protection attorney would assess already-existing protections, and recommend strategies to protect assets that remain exposed.
3. Yes, the estate planning benefits of FLPs have now been minimized in light of the increase of the federal estate tax exemption from $5.4M to $11.2M at the end of 2017. However, one should keep in mind that the estate tax exemption is a moving target, one often subject to competing political interests. For instance – – and without any political statement or judgment – – Hillary Clinton sought to bring the $5.4M exemption back down to $3.5M, which was the 2009 exemption amount. The current $11.2M exemption is set to sunset in 2025. What the exemption will be in 2025 is of course unknown now, but will be subject to endless political debate and will also be dependent on who is in the White House and controls Congress in 2025. Also keep in mind that STATE estate taxes exist apart from the federal estate tax, and can also be significant. Finally, the asset protection benefits of FLPs exist irrespective of the estate tax benefits.
4. Costs are not as high as some of the posts suggest. One FLP is more in the neighborhood of $5K and annual maintenance costs are a few hundred dollars to renew with the Secretary of State (like an LLC). Your CPA would prepare an IRS Form 1065 for the FLP and issue K-1s to the partners. The CPA costs for this should not be extreme. These annual upkeep costs are in-line with the annual upkeep costs for LLCs. These costs are far outweighed by the asset protection and other benefits that the FLP would provide.
Thank you for the opportunity of providing this guest blog. I hope it has been educational to readers of White Coat Investor. In my practice, we have assisted hundreds of doctors over the years with FLPs and the response has been overwhelmingly positive.
Mr. Rubinstein,
Thank you for the very informative post. It’s very timely for me as I have been looking into different vehicles for asset protection recently. Could you give us a quick FLP vs trust rundown (if quick is even possible)? I live in Arkansas. According to some attorneys I have spoken with recently, our state has some unique laws that make an inter vivos marital trust a great option for asset protection. I’m still looking but wanted some thoughts on FLPs vs trusts. Thanks!
Wife and I are dual physicians. Just started the FLP process with a different company because it included estate planning as well as asset protection. Paid a flat fee that allows unlimited corporations to be established if needed over time. Fee was similar to cost of just doing estate planning alone, thus it works for us because we have also procrastinated on estate planning.
Don’t know the fee structure for the OP’s firm.
WCI, okay to be available via PM if others have questions for me? Don’t want to be rude to the OP while trying to be helpful to the community.
Not sure what you mean by “okay to be available via PM” but I’m assuming you’re referring to the forum. If you don’t wish to answer questions here, you can certainly tell people a different way to contact you.
Sorry for the confusion with terminology. I appreciated the Mr. Rubinstein’s article and didn’t want to be inconsiderate to him by mentioning a competitor.
Happy to answer questions here if they arise.
Did you use the company, Legally Mine?
My physician husband recently attended one of their presentations. I looked into them and found many negative reviews.
Were you happy with the service provided? Do you find the FLP structure to be cumbersome.? After reading the comments here and those in another post on this site, I would like to find an alternative for protecting unprotected assets of significant value. Any affiliation with the company?
Excellent topic. We have had our finances “enveloped” in a Family LLC similar to the described FLP now for 10+ years. We have a sub LLC for a lake cabin. As stated, 401k and primary residence is already protected. We did it mainly for asset protection. We are dual physician family in low to moderate litigation risk specialties but practice in a low risk state (MN). I actually think the risk of a nonmedical related law suit is greater (i.e. slip on the front step of the house and become permanantly disabled). Overall, it has worked out pretty well. There have been some unintended consequences along the way, mainly with certain entities unwilling to receive LLC accounts and holding an annuity in a LLC is subject to capital gains taxation annually. There is a small hassle factor of filing with the state annually. Takes a lot of upfront work to move everything to the LLC and make sure the ownership and benefactors are correct. Would I do it again — not sure. I think the risk of ever needing our LLC for asset protection is very low. As stated, the present estate planning exemption is 11.4M. This will likely change but who knows. One takeaway from this is make sure you have good (2 M+) personal umbrella liability coverage. This is pretty cheap coverage.
How secure are assets held as tenants by entirety in a state that recognizes this like Florida? Does a family limited partnership provide better asset protection?
Remember tenants by the entirety only protects the assets if only one of the two spouses is sued. If you’re both sued, it doesn’t do any good.
Much of this stuff is State specific. Having an attorney form the LLC/LP allows for attorney-client privilege. Any entity must have a legitimate business purpose, such as passing on wealth. “Asset Protection” is not a legit business purpose. I have heard experts say that “Family” should never be stuck in front of “Limited Partnership.” LLC’s have members, LP’s have general partners/limited partners. Only the limited partners have limited liability in an LP. An LLC could be a General Partner in an LP. LP’s are best for assets that have “outside” liability , where the risk comes being sued for professional negligence. Since a brokerage account with Stocks and bonds would unlikely generate a lawsuit, these kinds of assets are best held in an LP. Boats, cars, Real Estate generate “inside” liability, best put in an LLC. An LLC is a company, not a “corporation.”
How not to do it: https://www.forbes.com/sites/jayadkisson/2013/12/28/the-high-flying-debtor-gets-his-wings-clipped-in-newcomer/2/#70e9548f7cdd
https://www.forbes.com/sites/jayadkisson/2018/01/16/asset-protection-year-in-review-2017/#19f63ef44e27
I have to say I am very skeptical of the rosy scenario presented here for an FLP. They have been under attack by the IRS for the maneuver of discounting assets for estate tax purposes.
In many jurisdictions a charging order is not the only remedy against a limited partner. Depending on the state, creditors can foreclose on the partners interest or force dissolution of the partnership, which can be a disaster for the partner defendant and for the other limited partners.
There has not been much case law that I can find about success in repelling creditors with the FLP setup.
As a counterpoint, these articles gets into the weeds about how and how well many of these structures work. It is a lot more complicated than portrayed here. http://www.npepc.org/resources/Documents/Langa%20Advisor's%20Guide%20to%20Asset%20Protection%20Planning.pdf
https://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/symposia/2008/te34pruett.authcheckdam.pdf
https://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/symposia/2007/spielman.authcheckdam.pdf
If it becomes worth the while of the creditor, the process of defending these structures could be very costly. The creditor also will look to find any errors in complying with the complex form of an acceptable business. Many efforts to protect a doc’s assets from a malpractice suit will not work nearly so nicely as presented here.
I did not notice whether anyone answer the question about why not just use umbrella insurance. The umbrella policy would provide no protection at all for a malpractice suit. Umbrella insurance does not cover the professional practice or any liability from it. That would require malpractice insurance.
Yes, I completely agree with AFAN. FLP are complicated structures with still unsettled law. My estate attorney says if you control it, a determined creditor can breach it. Give the money away in trust. If you cannot get the money, neither can your creditors. Keep adequate insurance, practice good medicine and you will be fine.
This is from Mr. Rubinsteins website.
Once an FLP Is Funded, Can Those Funds Be Accessed?
March 3, 2011 By Asher Rubinstein, Esq.
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Clients often place money into a Family Limited Partnership (FLP) for asset protection and estate tax benefits. The clients then ask how they may access those funds in the FLP.
The first means of accessing FLP funds is via distributions. Distributions from the FLP to its partners must be pro rata. In other words, if the general partner determines to distribute funds to the FLP’s partners, each partner must receive a distribution commensurate with his or her partnership percentage. It is important that distributions be made pro rata, otherwise a creditor may be able to demonstrate that the formalities of the FLP agreement have not been met, and convince a court to pierce the FLP and reach FLP assets. Distributions should be recorded properly for accounting purposes. Distributions that exceed FLP profits (and are a return of capital) should also be papered properly with FLP resolutions. Again, the proper formalities should be observed in order to preserve the integrity of the FLP entity.
Another way of accessing FLP funds is via a payment of compensation. Payment of compensation to a general partner is possible in return for the services that the general partner performs for and on behalf of the FLP, e.g., managing FLP assets and investments. While payment of compensation will be taxable as income to the partner who receives it, it will be a deductible expense to the FLP. Compensation need not be distributed pro rata to all FLP partners.
A third way of obtaining funds from an FLP is via a loan from the FLP to a partner. Again, formalities should be observed, e.g., proper loan documentation should be executed and the borrower should make regular interest payments to the FLP, otherwise a creditor may be able to pierce the FLP and argue that the loan is a sham. In addition, if the loan is not a bona fide loan, the IRS may be able to argue that the loan is really taxable income to the recipient.
Thus, once the FLP is funded with liquid assets, those assets can still be accessed by the partners in the FLP if the need arises. However, proper formalities must be observed in order to safeguard the asset protection benefits of the FLP and to avoid potential negative tax consequences.
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This is a basic question, but how do you utilize your assets in a FLP to live on? Distributions go to all the partners, and generally the managing partners are under 5% of the ownership. So, distributions essentially go to everyone but the managing partners.
It seems you would have to leave enough assets out of the FLP to live on, thus leaving them exposed.
Am I missing something really basic?
Yes. The person putting the money in is both a general and a large limited partner.
“how do you utilize your assets in a FLP to live on?”
I believe the answer is “you don’t. Doing that would ruin the protection offered by the FLP.”
See below for a more balanced view of the potential use of an FLP and the many limitations.
https://www.assetprotectionbook.com/forum/viewtopic.php?t=257
There is not some magic wand you can waive over your assets and suddenly make them just as available to you but out of reach of creditors. It does not work that way.
That is the part that is completely de-emphasized when you read about or talk about FLP’s. You need to be truly wealthy to be in the position that you can gift away enough assets to make this worthwhile, while still retaining enough assets to live on for the rest of your life. And if you retain enough assets to live on for the rest of your life, then they are exposed – and you have defeated the purpose of asset protection.