Family Limited Partnership vs. Wyoming Limited Liability Company

A lot of asset protection attorneys sing the praises of family limited partnerships to no end, and to some extent I agree with those lawyers. Family limited partnerships are an excellent tool for some asset protection and estate planning purposes, and when appropriate, I use them a lot.

That doesn’t mean that family limited partnerships are the best tool for protecting assets. In fact, a Wyoming limited liability company is far superior for most purposes, and I’m about to tell you why I almost always use Wyoming LLCs as part of my asset protection planning strategies.

A Few Quick Definitions

The term Family Limited Partnership or FLP is a descriptive term used to define statutorily created limited partnerships that are owned by family members. There is no such thing as a state law or statutorily created “family limited partnership.” Limited partnerships must have at least two real people or business entities as partners, and FLPs have the benefit of pass-through taxation (i.e. they don’t pay their own taxes; rather, income goes directly to the partners who are taxed).

Limited liability companies are also creatures of statute, and they can be operated by the members or by a manager. In other words, LLCs can be operated like partnerships or like corporations. LLCs can also be single or multiple member, and just like limited partnerships, they have the benefit of pass-through taxation.

Benefits of Wyoming LLCs

Wyoming was the first state to pass a statute authorizing use of limited liability companies, and there are a number of advantages to Wyoming LLCs over family limited partnerships:

  1. Privacy – The Wyoming government does not keep electronic records of a limited liability company’s members or managers, so there is a high degree of anonymity for assets held inside a Wyoming LLC. Family limited partnerships DO NOT provide this level of privacy.
  2. Better Protection than FLPs – Unlike a family limited partnership, there is no need for general partner to assume personal liability. In other words, you will always be personally liable for obligations of a family limited partnership but not for the obligations of a Wyoming limited liability company.
  3. Tax Deductions – Losses within a family limited partnership cannot be deducted by limited partners because of the passive activity loss rule. However, if a member or manager of an LLC is an “active participant,” then losses should be deductible.
  4. Portability – Many foreign jurisdictions recognize limited liability companies, so you could theoretically transfer your LLC to another country if needed to protect yourself. While FLPs are recognized in Commonwealth countries, they are much harder to move from one jurisdiction to another.
  5. Charging Order Protection - Wyoming LLCs provide the same level of charging order protection available with FLPs.
  6. Valuation Discounts – Like FLPs, non-control interests in Wyoming limited liability companies can be discounted when gifted as part of estate planning.
  7. Management – Wyoming limited liability companies are versatile in that they can be managed by the members of the LLC or a separately designated “manager” (who can also be a member).

Family Limited Partnership vs. Wyoming Limited Liability Companies

I know of at least one asset protection attorney who uses the following rationale for preferring family limited partnerships over Wyoming limited liability companies (this is a paraphrase):

“The protections created by family limited partnerships are statutory in nature whereas LLCs get their protections from contract law. In addition, family limited partnerships can’t be automatically or administratively dissolved for forgetting to file an annual report.”

Both of those statements are false.

The fact is that Wyoming limited liability companies derive 100% of their asset protection features directly from statute, just like family limited partnerships. If you don’t believe me, look at section 17-29-503 of the Wyoming Limited Liability Company Act regarding charging order protection. Don’t be fooled into thinking that family limited partnerships provide superior protections. They just don’t.

Regarding “administrative dissolution,” it’s true that a Wyoming limited liability company can be automatically dissolved for failure to file an annual statement but the same is true of most state family limited partnerships (at the least in states with strong protections, like Delaware). In any case, preferring a family limited partnership over a Wyoming LLC based on this fact alone is simple laziness. It’s not at all difficult to file an annual report.

Some asset protection lawyers use Arizona family limited partnerships for the simple reason that Arizona doesn’t require limited partnerships to file annual reports, so there is no risk of ever “blowing” a filing and causing a client’s FLP to be dissolved. But that convenience is far outweighed by the cost.

Family limited partnerships are inferior legal asset protection tools, because they do not provide any form of privacy.

Go to the Arizona Secretary of State’s website and type in an individual’s name. You’ll get the name of their personal asset protection family limited partnership, which means that creditors can easily find the family limited partnerships that are supposed to be providing privacy and asset protection.

On the plus side, Arizona doesn’t require annual filings for limited partnerships, so maintenance fees should typically be lower, but that’s not always the case.

Probably the most overlooked downside to using an FLP in the context of asset protection planning is that when you serve as the general partner of a family limited partnership and have a self-settled offshore trust serve as the limited partner, two things happen:

  • The FLP will not provide you with any protection, as it will be likely disregarded for failing to have two partners in the eyes of the law; and
  • You will be personally liable for the debts and obligations of the FLP. General partners always have personal liability.

Limited partnerships do serve a purpose, and I use them often for valuation discounts in the context of estate planning and also for creating investment funds. But they are not always ideal for asset protection purposes. The moral of the story is this: If you want privacy and asset protection, Family Limited Partnerships are not good enough.

Wyoming LLCs – The Best Tool for the Job

Wyoming limited liability companies have the same pass-through tax advantages of family limited partnerships, the benefit of versatile forms of management, and the strongest form of asset protection and privacy features available anywhere.

Besides giving you privacy and protection, a Wyoming LLC that’s properly integrated into your asset protection plan will allow you to invest broadly without having to compromise your privacy or protections. For example, here’s a list of things you can do in Florida while completely maintaining the privacy of your wealth and actions with a Wyoming limited liability company: Florida StatutesMost other states also have similar statutes allowing for passive activities and investment accounts, and I’ve never seen a client have trouble opening an investment or bank account with their Wyoming LLC.

If you’re interested in further discussing a complete custom asset protection solution for your needs, please call me today at (850) 803-1166.