Family Limited Partnerships and Irrevocable Trusts

Illinois Family Limited Partnerships Explained | Illinois Irrevocable Trusts Explained

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
November 1, 2019

In our past articles on estate planning, we have primarily discussed the Revocable Trust, which allows your estate to avoid probate but does not protect your estate from creditors.  If you are interested in using estate planning in order to shield certain assets from your creditors, two other vehicles may be useful: (1) the Family Limited Partnership; and (2) the Irrevocable Trust.

In our hour of need, let’s call on the Avengers to help make estate planning interesting, which is on par with saving New York from Loki in terms of difficulty.  In order to develop the super-soldier serum that would eventually imbue Captain America with his powers, Howard Stark borrowed several million dollars.  Although Howard has every intention and expectation of repaying the loan, he would like to make sure that his prized asset, Stark Tower, as well as his savings account, are protected from collection by his creditors in the event of a default.  His primary concern is ensuring that these assets are included in Tony’s inheritance.

Family Limited Partnerships

One way that Howard can protect his assets from his creditors is to transfer ownership of Stark Tower and his savings account into a Limited Partnership with Howard as a general partner and his son, Tony, as a limited partner.  If Howard does this, his creditors will not be able to access partnership property.

Howard’s creditors’ remedy would be to obtain a charging order requiring that any disbursements from the partnership to Howard be paid directly to the creditors.  If a judgment is entered against Howard, Howard can preserve Stark Tower and his savings account by avoiding disbursements to himself.  The downside of this strategy is that Howard will be required to observe certain formalities, such as an operating agreement.  Howard would also have to give up some interest in the property to Tony, even if it is only a future interest.

Irrevocable Trusts

Another option for Howard, which can be used either in conjunction with the Family Limited Partnership or independently, is to place Stark Tower and Howard’s savings account in an irrevocable trust.  Again, in this scenario, Howard would have to give up some sort of control or future property interest.

This is usually more palatable with respect to real estate than bank accounts.

For example, Howard could give himself the right to live at Stark Tower for a limited number of years, at which point the property reverts to Tony, the beneficiary of the trust.  Another option would be to provide the trust with the right to purchase the property at a price equal to the mortgage, which would supersede any creditors’ claims, making the property valueless to creditors.  The downside to both of these options is that they would inhibit Howard’s ability to sell the property.

If Howard wishes to protect his bank account through an irrevocable trust, he will be required to make Tony the beneficiary, meaning the funds in the account must be used for Tony’s benefit, not for Howard’s.

Bottom line:  Both the Family Limited Partnership and the Irrevocable Trust require you to give up some rights in the property that you wish to shield from creditors.  The rule of thumb is that the more control of the property that you give up, the greater the protection these mechanisms provide.

Additional Financial Considerations
from Financial Experts

From Financial Experts

For many years, financial institutions have been creating a disservice to clients and the industry as a whole for years.
View More Professional Considerations

Presented By O'Flaherty Law

What is a family limited partnership?

Need Legal Help? 

Schedule a

What to Expect From a Consultation

The purpose of a free consultation is to determine whether our firm is a good fit for your legal needs. Although we often discuss expected results and costs, our attorneys do not give legal advice unless and until you choose to retain us. Although most consultations are complimentary, some may carry a charge depending on the type of matter and meeting location.

Leave a Comment With Your Questions

Read more about

Estate Planning

Disclaimer: Our articles and comment responses do not constitute legal advice and are not intended to create an attorney-client relationship.

Please contact us to schedule a free consultation for legal advice specific to your situation.

Here are some articles that may interest you

Contact us for a Free Consultation

Schedule a free consultation

O'Flaherty Law is happy to meet with you by phone or at our office locations in:

Who We Are
We are your community law firm. Our Illinois & Iowa Attorneys are committed to providing exceptional client service in a cost-effective manner in the areas of Family Law, Probate, Estate Planning, Civil Litigation, Guardianship, Criminal Defense, Corporate & Contract Law, Bankruptcy and Real Estate.

Some of Our Accomplishments

Best Child Support Lawyers in Chicago
DuPage County Probate Attorney
Kevin P. O'Flaherty
Rated by Super Lawyers

loading ...
Naperville attorney
DuPage County Probate Attorney

Subscribe to our mailing list

* indicates required