Family Limited Partnerships reduce taxable estate

Family Limited Partnerships reduce taxable estate

 Family Limited Partnerships are flexible and offer a means to retain assets in the family.

What Are They?

A family limited partnership is established by family members who decide to pool a fund of money to collectively run a type of family business project. The FLP is consummated by family members, or partners who purchase units or shares of a business and its profits according to performance and number of shares owned. Two types of partners exist within a FLP; general partners who own the largest share of the business and take responsibility for daily cash and investment management, including being able to take a management fee from profits earned as they bear all the risks, and limited partners who have no management responsibilities but purchase shares of the business in exchange for dividends, interest and profits generated.

How Do They Work?

Family limited partnerships reduce taxable estate

In a family limited partnership, the older generation(s) typically contributes assets such as oil & gas rights, real estate, corporate stock, or cash. Once its determined which assets will be transferred, there is an exchange for a small general partner interest and a large limited partner interest. The contributions from older family members can be given to children and grandchildren directly or indirectly by being set aside in a trust. 

Why Establish a Family Limited Partnership?

It can be advantageous to have a FLP because it helps to pass down wealth to future generations within the family while limiting the amount of taxes to be paid. The partnership is flexible regarding the ability to amend the agreement if there are changes within the family such as divorce or additions. Assets become protected from claims of future creditors and/or spouses if a marriage fails. A creditor cannot force any distributions of cash, vote, or own the interest of a limited partner without the consent of a general partner. A FLP may also be advantageous for families where there may be uncertainty related to divorce because assets will stay in the family and are non-transferable outside of the family. This is simpler than maintaining separate trusts or accounts for every heir because under a FLP there is only one brokerage account.

Tax Advantages

Transferring assets into a FLP will reduce the taxable estate of the general partners to the partnership alleviating the amount of federal estate taxes to be paid upon the passing of general partners to the limited partners. At the time of transfer, limited partners will be eligible for valuation discounts. Transfers are also eligible for the annual gift tax exclusion, which is $15,000 for single individuals and $30,000 for married tax filers. Units of the trust are discounted for gifting purposes by their lack of liquidity & marketability providing for larger gifts to be made.

FLP Set Up Process

As with many other aspects of estate planning, careful thought must be given on how to allocate the items within the partnership. The developers must carefully structure the FLP in a manner that considers both current and future owners of the partnership. The first step in the FLP set up process is to prepare an agreement between both limited and general partners. Upon completion, the chosen assets can then be transferred into the FLP where interests will be accrued.

FLP Benefits Summary: Asset Protection - Asset Management - Wealth Transfer & Gifting - Estate Tax Reduction

References:

Family Limited Partnership-FLP. (n.d.). Retrieved from Investopedia: https://www.investopedia.com/terms/f/familylimitedpartnership.asp

Morrow, S. (2009, August). FLP: What is a Family Limited Partnership and How Can It Save Your Family Money? Retrieved from legalzoom: https://www.legalzoom.com/articles/flp-what-is-a-family-limited-partnership-and-how-can-it-save-your-family-money


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