Family Limited Partnerships as an alternative wealth planning tool

For various reasons the common law trust does not always provide the best solution for private wealth structuring.

A Family Limited Partnership is an alternative to the trust because it can offer similar (and often enhanced) levels of privacy, flexibility, donor control, confidentiality, asset protection, and estate planning opportunities.

Limited Partnerships are an incorporated version of a common law partnership

A Limited Partnership is a separate legal person and has the legal capacity to exercise all the powers of a natural person or company, subject to any restrictions contained within the partnership agreement. Unlike trusts, a Limited Partnership may exist in perpetuity.

A Limited Partnership is an incorporated entity, separate from its partners, having at least one general partner (‘GP’) and at least one limited partner (‘LP’). Any person or body corporate can be a LP, and there is no limit on the number of partners.

The General Partner is responsible for governance

The GP is responsible for the governance of the Limited Partnership and is jointly and severally liable with the Limited Partnership for all the debts and liabilities of the Limited Partnership. A GP can be a limited liability company with no significant capital of its own and is not required to make a capital contribution to the Limited Partnership.

Limited Partners are essentially capital contributors and passive investors

The LP's liability is similar to that of a company shareholder in that it is limited to its capital contribution. A LP that participates in the day to day management may lose its limited liability status and become jointly and severally liable for the debts and liabilities of the Limited Partnership. There are, however, certain specified "safe harbour" activities in which an LP may participate without losing its limited liability. These activities are similar to those actions which normally require a special resolution by shareholders of a company.

Limited Partnerships are regulated by a partnership agreement

Limited Partnerships must have a written partnership agreement which is similar to a contract made between the GP and each LP. The agreement must contain provisions which provide for such matters as:

1. assignment and disposal of LP interests
2. restrictions on activities that may be undertaken by the partners
3. entitlements to distributions
4. termination of the Limited Partnership
5. entry and exit of partners
6. procedure as regards partnership meetings

The partnership agreement is not publicly registered.

The GP owes specific fiduciary obligations to the Limited Partnership. Conversely, LPs do not owe fiduciary obligations unless specifically imposed by the partnership agreement.

A Limited Partnership is formed on registration with the Registrar and not on the earlier signing of the partnership agreement.

The GP has the authority to bind the Limited Partnership. Similar to companies, third parties contracting with the GP need not inquire as to the limits of the Limited Partnership's authority.

Both the GP and the LP can contribute to the Limited Partnership. Capital contributions can take any form (including services) but loans are excluded as capital contributions.

Partners who have made capital contributions are entitled to receive distributions. Payment of distributions is subject to a similar solvency test to that applied to companies.

Registration details for the Limited Partnership and the GP are publicly available from the Registrar of Companies. However, information about the LP is confidential and cannot be publicly accessed.

Limited Partnerships are fiscally transparent for tax purposes

Limited Partnerships are fiscally transparent for tax purposes and are not taxed at the partnership level.

Generally, the Limited Partnership will be structured so that only the LPs are entitled to receive income. LPs will be subject to tax on their share of the income generated by the Limited Partnership.

Limited Partnerships can be useful for private wealth structuring

A family patriarch, matriarch or other donor of assets may wish to protect assets, preserve confidentiality and otherwise provide for future generations of the family by forming a Limited Partnership through a professional firm or fiduciary services provider (‘Service Provider’).

The Service Provider would then incorporate a limited liability company to be the GP which would in turn establish the Limited Partnership.?

The interests of the LPs can be very flexible depending on the partnership agreement and can provide for effective succession planning from one generation to the next – particularly in the context of a family business empire. As the next generation gains more experience in the family business their respective shares in the Limited Partnership can be increased or varied at the discretion of the family patriarch or matriarch.

Through regular contact with the Service Provider, or even by having some formal control over the GP, the Donor can determine the investment strategy and distribution policy of the Limited Partnership.

The limited partnership agreement can provide for the Limited Partnership to be wound up after a certain period, on the occurrence of a certain event (such as the death of the Donor), or allow for the Limited Partnership to exist in perpetuity.

The limited partnership agreement and the constitution of a corporate GP can set out a family investment strategy and a management process that can be maintained over several generations. The board of directors of the GP can be provided by the Service Provider and/or the Donor and members of the family.

The Limited Partnership will then execute the investment strategy, for example, through an investment holding company, an investment management account, a bank account, or real property holdings.

The members of the Donor's family would normally be the LPs - either directly or through companies or trusts in which they have interests. The partnership agreement should be specific to the individual circumstances of the family and provide for how, when, to whom and in what proportions distributions can be made to the LPs. Normally family members will be restricted as to transfers of their partnership interests outside of the family.

The tax laws to which the Donor and the LPs are subject will change. It is therefore essential that tax advice be taken in all relevant jurisdictions and on a regular basis. However, as the Limited Partnership is essentially a “pass through" vehicle each family member LP will be taxed only on the distributions it receives from the Limited Partnership in the jurisdiction(s) to which she or he is resident for tax purposes.?This is especially useful when the LPs live or assets are situated in different countries.

As always a detailed discovery process is required before any new structure is designed and set up. A family limited partnership will not always be appropriate. But in our experience they can be very effective wealth planning tools and are worthy of consideration alongside or as an alternative to more traditional structures like trusts.