A Family Limited Partnership (FLP) is a type of business structure in which families pool assets such as businesses, real estate or investments. It typically serves as a wealth transfer tool, but it can also be a good way to manage and protect family assets from potential creditors. Texas, in particular, offers strong protections for FLPs, making them an attractive option for many families in the state.
Charging order protection
If a partner in an FLP has a debt, the person they owe (the creditor) has limited options to collect from their interest in the FLP. The creditor will need to ask a court for a “charging order,” which requires the FLP to pay the creditor instead of the debtor if the FLP decides to distribute money. However, the creditor cannot make decisions for the FLP or directly take its assets. This setup protects any family assets from claims against individual family members.
No foreclosure on partnership interests
Texas generally doesn’t allow creditors to foreclose on a debtor’s partnership interest in an FLP. This means that if a partner owes money to a creditor, the creditor can’t force the sale of the partner’s share in the FLP to settle the debt. This rule significantly protects other partners’ interests in the FLP. Even if a partner faces substantial personal debts, their ownership in the FLP remains protected. It helps ensure that family wealth stays intact, even if individual family members encounter financial difficulties.
The FLP is a separate entity
Courts usually treat a limited partnership as a distinct legal entity separate from its individual partners. This creates a barrier between the partnership’s affairs and the personal affairs of its partners, making it more challenging for creditors to “pierce the veil” or hold individual partners responsible for partnership debts. Texas courts are generally reluctant to disregard the partnership structure or allow this “veil piercing” unless there’s clear evidence of fraud or abuse.
It’s important to note that while FLPs offer strong protections, they must be for legitimate business or estate planning purposes. Courts may disregard the FLP structure if they find it served to hinder, delay or defraud creditors.
Secure your family’s future
Asset protection strategies like FLPs can be effective, but they require careful planning and execution. An attorney can help you create a strategy that aligns with your family’s unique needs and goals.