Family Limited Partnerships ("FLP")

One of the basic goals of any good estate plan is about protecting a person's estate - be it protecting a loved one to protecting a person's assets. Family Limited Partnerships, or FLP is a special estate planning tool that families that is used to protect assets and transfer those assets from one generation to the next.

The FLP boasts a number of advantages over not only outright gifts but over other methods of holding and transferring property, such as a corporations or trusts. It can be an extremely valuable tool for those seeking to maintain and pass on wealth within a family, while at the same time providing protection from potential creditors' claims and favorable tax treatment. Besides being used as a wealth transfer vehicle, the FLP can also be employed as a way for family members seeking to enter into a joint venture to pool their funds in order to undertake larger investments.

All members of a FLP relinquish assets into the partnership's "name," which is the basis for the FLP being treated as a separate entity for tax and other purposes. Each member has an ownership interest in the partnership, but the members do not share equally in decision-making and implementation of business strategy with regard to the partnership's assets and profits. Of the members, at least one will be designated a "general" partner, and the rest will be labeled "limited" partners.

The two most basic differences between general and limited partners are the extent of their liability for the FLP and their involvement in the business affairs of the entity. General partners remain personally liable for the partnership's debt, which means a creditor seeking to satisfy a claim against the partnership can also proceed against the general partner personally. In contrast, as a general rule, limited partners are liable only to the extent of their contribution to the partnership.

As to control, a general partner has decision-making power over the assets in the entity, whether and how to invest them, and other business-related matters such as taking distributions from the FLP's profits. A limited partner does not take on such a management role. While he has an equity interest in the partnership, he has no authority to demand distributions, transfer his interest without the consent of the general partner(s), or dissolve the partnership.

One of the biggest advantages of choosing a FLP is the favorable tax treatment. This can be attributed to the relinquishment of personal control over the assets by the FLP members and the reduced capacity for limited partners to exert any control over the entity or sell their interests in it. Generally, the more illiquid and complex the assets in the FLP are, the greater the potential is for estate tax savings to be realized through transfers of FLP shares between family members. These transfers are subject to a lower level of taxation than an outright gift would be, and they may be executed to take full advantage of gift tax exemptions annually.

Other advantages to the FLP are its flexibility (the partnership document can be amended, in contrast to, i.e., the terms of an irrevocable living trust), and its capacity to realize considerable gains in wealth through pooling of assets and investment over significant periods of time.

Like any estate planning entity, there are also certain drawbacks. Most of drawbacks relate to the administration of the FLP, including required fees and the preparation of separate tax documents for the entity. Moreover, although most of the FLP members enjoy limited liability, the fact that the general partner remains personally liable should be taken into consideration when weighing the risks and rewards of creating a FLP.

Once the decision to enter into a FLP has been made, the entity should be carefully tailored to the individual circumstances of each family to carry out its estate planning objectives and the assets. The most frequent type of asset held in an FLP is some form of family business. When used properly, the FLP can be an excellent tool to maximize familial wealth while protecting assets for future generations.

Basics of Estate Planning: Digital Estate Planning with a Dead 1950's Movie Star

In a federal lawsuit filed earlier this month, the estate of famous deceased actor James Dean is suing Twitter through CMG, a celebrity marketing firm with a reputation for challenging alleged misuse of celebrities' likeness. The plaintiff alleges that the anonymous Twitter user behind the "handle" "@JamesDean" is using Dean's name and likeness without authorization. CMG wants the popular "@JamesDean" account, which is currently being used as a fan page celebrating the actor's life, shut down by Twitter - presumably so it can then convert the account to an "official" page run by Dean's estate.

This is, by all accounts, a novel issue: Twitter is a new type of social media that has been in existence for less than 7 years, and CMG's suit seems to be the first of its kind. While CMG alleges misuse of Dean's intellectual property, Twitter has responded that its investigations into the account have failed to produce any evidence that the "@JamesDean" user is violating Twitter's trademark policy. The social media giant is cited as saying that "the account is not being used in a way that is misleading or confusing with regard to its brand, location or business affiliation." One of the core requirements in the finding of a trademark violation.

The Dean lawsuit underscores an important developing concept in the legal community: the idea that "digital assets," our "possessions" that exist only in cyberspace, have not only emotional but also financial value to them. As such, they should be carefully provided for in estate planning to ensure smooth and efficient estate administration. Digital assets have been defined to include everything from Twitter and other social media accounts to e-mail and photo storage, professional sites, and financial accounts, including bill pay services. While the Dean lawsuit is distinct from the typical estate planning scenario in that neither Dean nor his estate ever owned the Twitter handle they seek to gain control of, the fact that CMG is willing to take Twitter to court over the use of "@JamesDean" indicates that its value to Dean's estate is significant.

Trusts and estates attorneys - and their clients - are becoming increasingly aware of the need to include digital assets in the estate planning process, recognizing that this intangible property may be just as vital to future generations as the clients' tangible possessions. Making the inclusion of digital assets in estate plans even more important is the fact that state laws in this area are in flux, and the few third party-initiated lawsuits seeking access to decedents' accounts that have been brought - even where the plaintiffs are related to the account-holder - have often been denied on the grounds that they violate the companies' strict terms of use.

Estate of the Month: Nelson Mandela

Nelson Mandela, one of the most recognized political figures of the modern era, passed away late last year, with an estate worth over $4 million. His last will and testament was publicly read just this month, and while its contents were for the most part unremarkable and expected, the division of Mandela's estate - and, on account of a recent challenge, the will itself - do not come without their fair share of controversy.

While Mandela's will granted outright to family members almost half of the total value of his estate, not everyone in his close family was included in this distribution. During his life, Mandela was married three times, and had 6 children, 17 grandchildren, and numerous great-grandchildren, although not all were living at the time of his passingⁱ. Of the three children that survived him, Makgatho, Makaziwe, and Zenani Mandela, not a single one was mentioned in the will. (Some sources attribute this omission to sizable grants that were made to the children in the months leading up to Mandela's death.) Mandela's will, not surprisingly omitted any distribution to his second wife, Winnie Madikizela, aka Winnie Mandela, to whom he was married from 1958 to 1996 - almost 40 years - before the couple divorced.

So who did Mandela provide for in the will? To his widow, Graca Machel, he left various assets, including homes the two owned jointly and their contents (notably, valuable artwork), as well as the couple's cars. He also left sizable grants to Machel's two sons by her first husband, the former president of Mozambique. As to his family by birth, Mandela left gifts in various sizes and forms, including a quarter of a million dollars in trust to his oldest grandchild, who had had several public disagreements with the rest of the Mandela family. The rest of his money was distributed to his personal assistants, including Mandela's longtime personal assistant Zelda La Grange and several causes, including educational institutions.

More significantly, immediately after the will reading, questions were raised as to its validity. It seems that two amendments made to the will after it was executed reference not the August 2004 will read to the public, but another will, dated October 12, a full two months later. If such a will were located, a court challenge would likely be forthcoming seeking to invalidate the August document. Thus, what seemed on its face to be a fairly straightforward will - albeit with at least one significant omission - may soon be subject to attacks on several fronts. It remains to be seen whether the will read publicly - and the provisions Mandela made in it - will hold up to potential legal challenges.

ⁱMost recently, Zenani Mandela, one of Nelson's great-granddaughters died in a car crash the day before the opening of the World Cup in South Africa in 2010.