Family Limited Partnerships (‘FLP’s) provide a secure, very flexible, protective and tax-efficient means of accumulating family wealth. With you as its (managing) General Partner, all decision are under your 100% direct control. You select the mix of assets to be owned. You decide about investments. You choose the timing of distributions and income. A FLP can accumulate wealth and create ‘tax value discounts’ that improve your family’s long term financial future. They are a way to very privately hold interests in Corporations or Limited Liability Companies It offers your family a wonderful way to accumulate wealth while enjoying privacy, protection and tax efficiency.
Who Are the Players?
The General Partner (GP) can be you or a Corporation controlled by you. As GP you can receive a management fee and retain 100% of the control. By contrast, the Limited Partners (LP) have zero control even if they hold as much as 99% of the partnership interests. The 99% owned by the LPs does not have the same exposure or risk to financial loss. So what’s next? We strongly recommend the Limited Partner interests be held in one of five ways: (1) inside your Living Trust; (2) a Family Security Trust (3) an irrevocable Children’s Trust or (4) a multi-generation Family Legacy Trust.
What are the Tax Benefits?
You can use your annual $10,000 per person exclusion and your $675,00 Unified Credit exclusion to leverage the tax benefits for your family. The value of gifts made using these can be held inside the FLP under the general partner’s management and control while the ownership of the 99% majority interest has been transferred to your family members. Moreover, U.S. tax law allows ‘Tax Value Discounts’ of about one-third (1/3rd) and possibly more. As just one example, this could lower an estate of $900,000 for example down to $600,000 for tax value planning.
Try Running These Numbers
Let’s say you have an $800,000 rental income property, a family business or investment portfolio which you put into your Family Limited Partnership, allocating 5% ($40,000) to the General Partners and 95% ($760,000) for the Limited Partners. You and your spouse then gift your own Limited Partnership interests to the children and draw as income the positive cash-flow from the property, business or investment as your management fee. Over the next 20 years, your share grows to $200,000 and the children’s’ Limited Partnership shares are worth $3.8 million. When both parents die, the entire $4 million – including all of the growth – passes to the children’s control 100% free of estate taxes.
What about Lawsuit Protection?
The Family Limited Partnership enjoys a superior measure of lawsuit protection. If one of the partners loses a lawsuit, the remaining limited partners cannot be held liable for the debts of another limited partner. If the court issues a ‘charging order’ against a partner, the creditor may well end up paying federal and state income taxes on phantom income they can’t collect if the GP decides not to make an distribution! Then the creditor’s best option will be to reach a settlement with you on favorable and mutually agreeable financial terms.
How do we get started?
Our law firm will prepare the Family Limited Partnership. After all your documents are signed, we will assist in transferring title of the assets you’ve selected into your FLP. The whole process moves quickly once you make a decision to proceed.
How do I learn more?
We offer a variety of ways to learn more. You can learn face-to-face and meet with the experts at one of our Conferences, or you can take one of our Courses. In either one, you will have access to the information you need to protect your money, your privacy and your family. Take action NOW and contact us.
What is a family limited partnership?
A family limited partnership, or FLP, is a partnership often created by owners of a small, family-run business. Other common uses involve people who own rental property or have relatively large investment portfolios. The general partner of an FLP — often a parent — has full control over the partnership even if he or she owns only a small percentage of the FLP. The limited partners (often the general partner’s children) are passive investors and have few rights in the partnership. Limited partners have liability only for the amount of money or property that they contributed to the FLP. The general partner, however, has unlimited liability. Parents who have a legitimate business reason can create a family limited partnership to make gifts to their children. In addition to providing important tax benefits, the partnership structure prevents the children from selling their interests without the permission of the general partner, who happens to be one or both parents.
What are the benefits of a family limited partnership?
One key benefit of forming an FLP is that, as a general partner, you can give shares of the partnership to your children or grandchildren, and the value of the gifts can be reduced for tax purposes because they have limited marketability. And when you die, your own share of the partnership may be valued at much less than the actual value of the partnership as a whole, providing additional tax benefits. You can even take a salary and distributions from the FLP to maintain your current lifestyle. The legal and tax issues involved in forming a family limited partnership are complicated, so you’ll need the help of professional advisors in order to set one up.
What are some of the pitfalls to the family limited partnership?
While forming a family limited partnership has some definite tax and planning advantages, an FLP also has drawbacks. First, the Internal Revenue Service requires that a family limited partnership have a legitimate business purpose. For example, it’s OK to form an FLP if it makes managing a small business, rental property or even a portfolio of investments easier. Howerver, you cannot form a partnership if you simply want to reduce your taxes or dodge your creditors. The cost of setting up and operating an FLP can be high. In addition to hiring an attorney to draft the partnership agreement, you will also have to pay an appraiser or other valuation expert to appraise the assets for tax-discounting purposes. Your state may charge filing fees, as well.
What are some tax-smart ways of accelerating my giving program to my children?
There are a number of ways to accelerate your gifting program to your children. The Internal Revenue Service allows you to give up to $10,000 to anyone each year without triggering a gift tax. For example, you could give $10,000 to each of your sons and $10,000 to each of your daughters and still avoid the tax. If you’re married, your spouse can make separate gifts for the same amount, which means each of your children could get $20,000 a year without paying a tax penalty. You could also create a family limited partnership, or limited liability company, and make gifts of partnership or member units to your children at deep discounts. According to the National Network of Estate Planners, Denver, “Deep valuation discounts are acquired by gifting limited partner or non-controlling member units which will lack marketability and control; the discounts for these factors generally range around 35%.” In order to meet IRS standards, the family limited partnership must have a valid business purpose. The children who become limited partners must have the legal ability to exercise their rights, and capital must be a material part or reason for the income of the partnership.