Family Limited Partnerships

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 (1/3^rd) 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.