Family Limited Partnerships
Some of the hardest decisions a family can make are how to handle money, property and other family investments. An answer to these difficult questions, especially for families with considerable real estate holdings, is to establish a Family Limited Partnership (FLP). When used properly, an FLP can be very profitable and save families thousands of dollars in gift and estate taxes. FLPs provide both protection from creditors and flexibility not found in other trusts, as it can be amended or changed. Just as important, it can be structured with both the present and future owners in mind, thus protecting the generations of today as well as generations to come.
An FLP is a limited partnership controlled by members of a family. Like other limited partnerships, an FLP consists of two types of partners: general and limited. General partners control all management and investment decisions and bear 100% of the liability. Limited partners cannot participate in the management of the FLP and have limited liability. The partnership itself isn’t taxable; instead, the owners of the partnership report the partnership’s income and deductions on their personal tax return, in proportion to their interests.
In an FLP, the senior family members (parents or grandparents) generally contribute assets in exchange for a small general partner interest and a large limited partner interest. They can then give all or a portion of the limited partner interest to their children and grandchildren. This interest can go to the heirs directly, or be set aside in a trust. In either case, transferring limited partnership interests to family members serves the dual purpose of reducing the taxable estate of senior family members by removing it from their estates for federal estate tax purposes, while still retaining control over the decisions and distributions of the investment.
Transfers of limited partnership interests are also eligible for the annual gift tax exclusion, a powerful tool for reducing income, gift and estate taxes. According to law, the value of limited partnership shares can be discounted when transferred to family members. In addition, because of an FLP’s flexibility, the family members who are owners can usually amend the partnership agreement as family circumstances change.
An FLP also protects assets from claims of future creditors and spouses of failed marriages. Creditors may not force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. And in the event of a divorce, where a limited partner ceases to be a family member, the partnership documents can require a transfer back to the family for fair market value, keeping the asset within the family structure.
Vaksman Khalfin, PC, in consultation with your other professional advisors, can help you decide whether this solution is appropriate for you and how it can become a part of your overall estate planning and asset protection strategy.