THE FAMILY LIMITED PARTNERSHIP FOR
ESTATE PLANNING AND CREDITOR PROTECTION
By Ben M. Roth
Kamensky Rubinstein Hochman and Delott, LLP
7250 N. Cicero, Suite 200
Lincolnwood, IL 60712
The family limited partnership has the ability to be a very powerful estate planning tool
with a broad range of different applications and uses. Recently, this technique has received a
great deal of notoriety with a flood of articles covering the topic. Practitioners have been
comparing family limited partnerships to what was considered the recommendation of the last
decade - the use of the living trust. The family limited partnership can allow a family member to
maintain control over assets, and protect family assets from future creditors. This partnership
simplifies income techniques and allows assets to be maintained within the family.
A) Administration. The family limited partnership is merely a limited partnership
agreement in which the partners are members of the same family. Typically, a family limited
partnership will be formed by husband and wife and their children. In such a case the parents or
one of the parents may be the general partner(s) and the children limited partners. If the children
are not issued limited partnership interests initially, there may be a transfer of limited partnership
interests over a period of years. The family limited partnership will be governed by a written
partnership agreement in accordance with state law. The agreement will include the terms of the
partnership, capital contribution, capital accounts, distribution of cash flow and allocation of
profits and losses, limited liability for limited partners, and the management of the partnership
vested with the general partner(s).
The daily operations and management of the partnership are maintained by the general
partner(s), who may receive a salary for those services. Like any other partnership,
informational tax returns (e.g. IRS Form l065) must be filed by the family limited partnership,
even though all the income from the partnership is distributed to the general or limited partners.
The partnership itself should not be a tax paying entity.
All the general and limited partners will enter into a written limited partnership
agreement. The partnership must file a certificate in accordance with state law. In Illinois, the
filing of the certificate falls under the Illinois Revised Uniform Limited Partnership Act
B) Flexibility of a Family Limited Partnership. Compared to an irrevocable trust which
may not be amended, a limited partnership agreement is a flexible document. If all the partners
agree, the partnership agreement may be amended or terminated. In contrast, an irrevocable trust
generally may not be amended or terminated without court participation. A partnership may also
be terminated without adverse tax consequence. In contrast, there may be substantial tax
consequences on the termination of a corporation or the transfer of assets out of an irrevocable
C) Advantages of a Family Limited Partnership.
1. Consolidation of family assets into a partnership may lead to significant operational
2. The use of a partnership may simplify annual gift giving by the senior family
members. Not only is it easier to provide a gift of undivided interest in the partnership, but the
transfer of a limited partnership interest can be discounted for greater flexibility.
3. Family limited partnerships can provide some protection of family assets against
future creditors. Unless there has been a fraudulent conveyance of the partnership, a creditor
may not reach the partnership assets. While the creditor will not have any management right, the
creditor may be entitled, should they be victorious in a suit against the creator, to receive
distributions from the partnership that the creator would have been entitled to receive. However,
the partnership agreement can be drafted to provide that an involuntary transfer of partnership
interest to a creditor is not a permissible transfer and the transferred interests cannot be issued.
Therefore, a properly drafted partnership agreement can allow the managing partner to retain the
assets within the partnership and to treat the recipient of a claim against the partnership as
receiving a pro rata share of the income within that year, thereby compelling the creditor to pay
tax on income that they did not receive.
In January 2006, Illinois improved their limited partnership format by allowing the
creation of an LLLP - a Limited Liability Limited Partnership. This format provides increased
creditor protection to the limited partners and the general partner(s). Prior to this change in the
law, many limited partnerships utilized a corporate general partner to provide full creditor
protection to the general partner(s). This additional step is not necessary under the new
4. The family partnership agreement can provide greater flexibility in operations and
investment authority since management is controlled by the general partner(s), thereby avoiding
family disputes because all family members will not have the control over the assets involved.
THE BOTTOM LINE
A family partnership can be used in a number of situations to save estate and gift taxes to
older generation family members and to accomplish various estate planning goals. The creator
must consider that the development of this agreement is formidable, and will incur costs in
initially establishing the partnership, and minimal accounting costs in maintaining the
partnership on an ongoing basis. A properly tailored partnership can solve specific goals and
problems for an individual's needs and provide a significant benefit to family and overall
management of the assets.