Does a Family Limited Partnership Protect Personal Assets? Here’s What You Need to Know

Quick Summary

Does a Family Limited Partnership protect your personal assets? The answer is yes, but with important limitations. This article explains how FLPs shield limited partners’ assets, the risks faced by general partners, and the need for proper management to maintain protection. It also explores stronger options like irrevocable trusts and offshore trusts for enhanced security. For more detailed guidance on asset protection strategies, visit our blog.

Considering Creating a Family Limited Partnership (FLP)?

A Family Limited Partnership (FLP) is a popular estate planning tool that allows families to manage and transfer wealth. This is often through real estate, investment accounts, or family businesses, while maintaining control and limiting tax exposure. It separates roles between general partners (who manage the assets and assume liability) and limited partners (typically heirs or family members with passive ownership and limited liability).

But how much protection does an FLP really offer? Can it shield your personal assets from lawsuits, creditors, or other legal threats?

In this Blake Harris Law guide, we’ll break down how FLPs work, where they fit into a broader asset protection strategy, and, most importantly, whether they can truly protect your personal assets.

Why Listen to Us?

With over a decade of experience, Blake Harris Law has helped thousands of clients protect their assets, including through Family Limited Partnerships. 

Attorney Blake Harris, a leading authority frequently quoted in Forbes, provides experienced guidance to ensure your wealth is secure. We understand when an FLP provides genuine asset protection and when it may give a misleading sense of security. This guide draws on our experience assisting clients in managing these risks and developing thorough protection plans.

Does a Family Limited Partnership Protect Personal Assets? – Quick Answer

Yes, an FLP can protect personal assets by separating them from individual liability, particularly for limited partners. However, protection is not absolute and depends on proper formation and management of the FLP.

To provide a more comprehensive answer, let’s examine how FLPs achieve this protection and what their limitations are.

How a Family Limited Partnership Protects Assets

FLPs protect personal assets primarily through the limited liability offered to limited partners. If the partnership incurs debts or is sued, the personal assets of limited partners, such as homes or savings, are generally safe, as their liability is capped at their investment in the partnership. 

By transferring assets into an FLP, owners segregate these assets from their personal estate, making it harder for personal creditors or lawsuits to reach them. Additionally, FLPs are instrumental in estate planning, allowing for efficient wealth transfer to family members while potentially minimizing estate taxes through valuation discounts on gifted interests. 

For instance, transferring a $2 million property into an FLP might allow parents to gift limited partnership interests to their children at a discounted value, reducing estate tax liability.

Consider a family that owns a valuable real estate portfolio. They transfer the properties into a Family Limited Partnership, with the parents as general partners and the children as limited partners. If one of the children faces a lawsuit or bankruptcy, the real estate remains protected because it is owned by the FLP, not by any individual.

To ensure your FLP provides maximum protection, consider these best practices:

• Maintain strict separation between personal and partnership finances.
• Keep detailed records of all partnership activities and decisions.
• Hold regular meetings of the general partners and document them properly.
• Avoid using partnership assets for personal expenses.
• Consider appointing a corporate general partner to limit personal liability.
• Regularly review and update the partnership agreement as needed.

By following these guidelines, you can help ensure that your FLP remains a robust shield for your personal assets. At Blake Harris Law, our asset protection attorneys guide clients through these steps to maximize the effectiveness of their FLPs.

Limitations of Family Limited Partnership for Asset Protection

While FLPs offer significant asset protection, they are not without limitations. General partners, who manage the partnership, face unlimited liability for the partnership’s obligations. This means their personal assets could be at risk. 

For example, if a general partner is sued for partnership debts, their personal savings or property could be targeted. Additionally, if the FLP does not maintain proper formalities, such as separating business and personal finances or holding regular meetings, courts may disregard the limited liability protection through “piercing the corporate veil.” 

FLPs also do not shield assets from claims related to personal guarantees, where an individual has promised to pay a debt personally. Another critical limitation is the potential for IRS challenges; if the FLP is seen as lacking a legitimate business purpose and is primarily used for tax avoidance, the IRS may disallow the tax benefits associated with it.

For instance, if the general partner (e.g., a parent) is sued personally for something unrelated to the FLP, such as a car accident, their personal assets, including their interest in the FLP, could be at risk. It often depends on the jurisdiction and the nature of the claim.

Given these considerations, it’s important to be aware of stronger alternatives that might better suit your needs.

Strong Alternatives to Family Limited Partnership for Asset Protection

Family Limited Partnerships (FLPs) can play a useful role in estate planning, especially for transferring ownership and managing family-controlled assets. But when it comes to protecting personal wealth from lawsuits or creditors, FLPs (particularly for general partners) may fall short. Fortunately, there are stronger legal structures available that offer greater asset protection and flexibility.

Below, we explore four proven alternatives and how they compare to FLPs in terms of risk mitigation and control.

Irrevocable and Domestic Asset Protection Trusts (IAPTs and DAPTs)

Irrevocable trusts remove assets from your personal estate and place them under the control of a trustee for the benefit of named beneficiaries. This separation of ownership is what makes them so effective—creditors cannot typically access what you no longer legally own.

Domestic Asset Protection Trusts (DAPTs) go further. Available in select U.S. states like Nevada, South Dakota, and Wyoming, DAPTs allow the grantor to remain a discretionary beneficiary while still shielding assets from most personal creditors. They offer a strong middle ground: substantial protection without going offshore.

Example: A business owner transfers a $5 million investment portfolio into a Nevada DAPT. Even in the face of a lawsuit, the assets remain outside the reach of personal creditors due to the trust’s legal structure.

Offshore Trusts

Offshore asset protection trusts, especially in jurisdictions like the Cook Islands, Belize and Nevis, provide the highest levels of protection due to their strict privacy laws and creditor-hostile legal environments. Unlike FLPs, which retain liability for general partners, offshore trusts eliminate personal ownership entirely.

Example: A physician transfers real estate holdings into a Cook Islands trust. Even if sued in the U.S., a creditor would face an uphill legal battle offshore, with costly proceedings and tight local deadlines making collection extremely difficult.

Limited Liability Companies (LLCs)

Unlike FLPs, where general partners have unlimited liability, LLCs offer full limited liability for all members. Assets held in an LLC are legally separate from personal assets, helping protect wealth from lawsuits or business-related risks. LLCs also allow for flexible ownership structures and are often simpler to manage than trusts or FLPs.

Example: A family forms an LLC to hold a portfolio of rental properties. If a tenant sues, any judgment is limited to the LLC’s assets, not the personal assets of its members.

Bonus: Charging Order Protection

In many states, LLCs benefit from charging order protection, which limits a creditor’s ability to access distributions from the LLC. This makes it far less attractive for creditors to pursue LLC-owned assets in litigation.

Combining Structures for Enhanced Protection

Layering legal structures can significantly strengthen asset protection. For example, an FLP can be owned by a domestic or offshore trust, combining the management benefits of a partnership with the liability protection of a trust.

Example: A family business is held by an FLP, which is in turn owned by a Nevis trust. Even if the FLP is legally challenged, the trust ensures that underlying assets remain insulated from creditors.

Ultimately, FLPs have their place in wealth management. But, they are rarely the strongest option for personal asset protection. Trusts, LLCs, and layered strategies offer more secure, flexible solutions for shielding wealth against risk. At Blake Harris Law, we help clients structure their assets using the most effective tools available under U.S. and international law.

Comparison of Asset Protection Strategies

Move Past Basic Protection with Blake Harris Law

Family Limited Partnerships are a powerful tool for asset protection and estate planning, offering benefits such as limited liability, tax advantages, and control over family assets. However, they do come with limitations, such as the unlimited liability of general partners and the need for strict compliance with formalities.

For those seeking even stronger protection, alternatives like offshore trusts may be worth considering. At Blake Harris Law, we specialize in crafting comprehensive asset protection strategies tailored to your unique situation. Contact Blake Harris Law for a free consultation.