A recent decision by the United States District Court (ND Calif.) questions the effectiveness of family limited partnerships as asset-protection devices.  In United States Fidelity and Guaranty Co. v. The Scott Companies (May 10, 2007), two defendants faced a $14.7 million arbitration award on their guaranty of a loan.  In post-settlement asset investigations, plaintiffs found that each defendant established an FLP during the litigation, ostensibly for estate planning purposes—but effectively transferring over $5 million to their wives and children, primarily in the form of real estate holding companies and real property.  The FLPs had appeared on the defendants’ sworn financial statements, but discounted on two levels, 15% at the first and 40% at the second.

Plaintiffs claimed the FLPs were fraudulent transfers—and won, the Court discrediting the FLPs as much as their valuation techniques, including multi-level discounts.  The case abstract will appear in the next BVU (and copies are now available to subscribers of BVLaw™ at BVLibrary,com.)   For more on the “Do’s and Don’ts of FLP Valuations” (including a free copy of “Why NAV May Not Be the Best Method for Valuing Multi-Tiered Entities,” by Lari Masten and Dennis Webb, first published in the November 2006 BVU) see BVWire #53-2.