Alternatives to Using an FLP or LLC

by Timothy James
You should carefully review the characteristics of a trust.

You should carefully review the characteristics of a trust.

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You can use a Family Limited Partnership (FLP) and a Limited Liability Company (LLC) not only to conduct a conventional business, but also for asset protection and asset planning -- even when no active business is involved. Both an FLP and an LLC allow participants to avoid liability for debts to an extent and minimize taxes when transferring assets to others, such as children. Though these are popular devices, other options also allow for asset protection and estate planning.

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Irrevocable Trusts

An irrevocable trust is a legal entity that you can use to store property or assets. Once you place your assets in an irrevocable trust, you cannot later revoke the trust and take the assets back. You can use several different types of irrevocable trust as an alternative to an FLP or LLC. For example, you can place a life insurance policy in an irrevocable life insurance trust, which protects the policy and any funds it pays out from inheritance taxes. These same benefits are also available through a spendthrift trust, which pays money to a beneficiary but leaves control over assets to the person administering the trust, allowing you to ensure the money is spent wisely.

Formation

When you create an FLP or LLC, you're essentially creating a business. There is substantial paperwork involved in both setting up and maintaining the business and, depending on your state, you may have to pay substantial fees and taxes. By contrast, an irrevocable trust is comparatively easy to set up and does not require as much paperwork. You can usually set up an irrevocable trust through a bank, though most people also consult with an attorney or financial planner before doing so.

Control and Fraudulent Conveyance

When you create an FLP or LLC, you can award yourself control of its assets. By contrast, when you create an irrevocable trust, the assets held in trust irrevocably pass to the control of the trustee of the trust. Note that you cannot shift assets of any type into an FLP, LLC or irrevocable trust for protection once your assets are at risk from a lawsuit or creditor. The law considers these types of transfers to be "fraudulent conveyances," and will penalize you if you transferred the asset for less than fair market value and then were unable to pay money owed.

Taxes

Using an FLP or LLC allows you to avoid paying both estate taxes and corporate income taxes. However, anyone receiving money from the FLP or LLC must pay personal income tax on money received. By contrast, an irrevocable trust generally pays income taxes on ordinary income and capital gains, much as a corporation would. An irrevocable trust does, however, allow its creator to avoid paying estate taxes, allowing for substantial savings.