Six Tips for Physicians Utilizing Limited Partnerships to Protect Assets

As we discussed last week one common but misunderstood tool prescribed to doctors as part of their estate and asset protection planning is the “limited partnership” (LP) also commonly referred to as a “family limited partnership” (FLP).

We briefly described the broadest view of what an LP is and what experienced asset protection planners use them to hold. This week we will start to explore some generally applicable specific rules. This legal structure, like most others, has specific formalities of both formation, (setting it up right, drafting, and funding) and maintenance (using it right, keeping funds from being co-mingled, reporting, accounting, etc.). The following are some simple tips and rules for using your LP in a legal and defensible way.

1. Get real, experienced help. All partnerships are not created equal, and one designed purely for the operation of a business between unrelated parties (think business lawyer) or the transfer of wealth to your heirs (like estate planners create) may not be adequate or on point for your usage and drafted with the specific protective intent we discuss here. Avoid promoters selling kits and online form documents at all cost. Ask the planner you choose how many LPs they have created, for whom, and for what purpose.

2. It’s not “you,” treat it like a separate business someone else owns. Avoid co-mingling partnership owned assets and your personal funds just as if the LP was a business you did not own. Get a separate tax ID number, commonly referred to as an EIN and open or re-title accounts in the name of the LP and under its tax ID number. A simple test question to ask yourself when dealing with LP funds is: “If I worked for this 'company' but did not own it would this be OK?” It will help you understand the distance and formality required to have the LP hold up.

3. Make it official. Re-title assets transferred to the LP to reflect the LP’s legal ownership. Your interest in real estate (properly insulated in an LLC); personal property (transferred through a bill of sale or formal assignment) and marketable securities should be properly transferred to the LP and recorded as soon as possible so that the LP will be the proper titleholder when income is received from these assets. Records of all such transfers should be maintained with your LP records.

4. Maintain detailed business records. This is the “proof” required if your LP is ever challenged. All business proceeds and profits from LP-owned assets should be deposited into the LP account and all LP expenses should be paid from it. Make sure that all federal and state income tax returns are timely filed and accurately prepared. A regular accounting of all partnership income and expenses should be maintained and the partnership should hold an annual meeting at a minimum, (more often if the partners are conducting a wide range of active investment activities) and should maintain the formal minutes of those meetings as part of the LP’s records.

5. Don’t draw risk into your new “safe.” Risky assets are almost never titled directly to your LP. They should be firewalled in LLCs or other vehicles so that real property (real estate) liability is one arm’s length removed from the LP itself, this includes raw land. Safe assets, on the other hand, can be directly titled in the name of the LP. Examples of safe assets include stocks, bonds, securities CDs, and money market accounts, to name just a few.

6. Think long-term. Those assets necessary for your daily living expenses should be kept outside the LP so that it does not create the appearance that the LP is merely another personal “piggy bank” account holding any given partner’s personal assets. If any partner regularly dips into the LP it can lead to a direct piercing by either a judgment creditor of the LP, by a reverse piercing of the LP veil by a judgment creditor of the partner(s), or even by the IRS at the time of a partner’s death.

Again, these are general rules on an issue that require specific, professional guidance and not legal or tax advice specific to you. Next week in the third and final part of our examination of the limited partnership we will discuss other specifics like funding (what goes in it and how), distributions (how money gets out), and how it can be part of an estate plan.

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