FLP: What Is a Family Limited Partnership?

Regardless of its growing popularity, a family limited partnership comes with some considerable drawbacks that could make it an improper device for your estate plan.

As an estate planning device, the FLP can play a invaluable role in the estate planning process. Nevertheless, it comes with added expenses and drawbacks. It’s important to properly assess if utilizing an FLP is suitable for your particular needs and, if so, to get professional assistance to arrange and maintain the FLP so that it is productive.

A family limited partnership, how does it work?

An FLP is a particular kind of limited partnership that includes two kinds of partners:

• General partners. usually, general partners of an FLP are more older family members—parents or grandparents—that have amassed a certain degree of wealth. They keep total control over assets they have placed into the FLP, but the overall nature of their partnership shares also means they have unrestricted liability.
• Limited partners. Through an FLP, limited partners are generally consisting of young family members, like children or grandchildren. Dissimilar from general partners, these partners have nothing to say in the partnership’s operation, but they do retain, to some level, the safeguarding of limited liability.

How to establish a family limited partnership

In a common FLP, parents transfer assets to the partnership in return for general and limited partnership shares. They keep their general partnership shares and might also have some limited partnership ones. The leftover limited partnership shares are allocated between their children and grandchildren, that then turns into limited partners.

Whereas the FLP is most generally used as an estate planning means, it’s important to remember that it is required to be operated like a limited partnership to maintain its authenticity as an FLP.

Family limited partnership benefits

FLPs have several benefits within the terms of an extensive estate plan. These advantages comprise of:

• Asset safeguarding. Since the FLP is an individual legal entity, after assets are appropriately passed to the ownership of a FLP, those assets turn into the property of the FLP. This successfully places these assets outside the hands of any future or possible creditors of the individuals (general partners) that owned the assets in advance of their transfer to the FLP. The partnership contract can guarantee that when a limited partner is longer a family member—for instance, in terms of divorcing—their shares are required be transferred back to the FLP, typically at fair market price. This has the result of retaining assets within the family.
• Control and adaptability. Being a limited partnership, an FLP is operated according to its partnership contract. Meaning that general partners keep management over the FLP’s assets. And since the partnership contract is open to modification, the FLP keeps a particular measure of adaptability for its general partners.
• Reduction of estate tax. Transferring assets to an FLP takes them out of the general partners’ estates, in which in effect decreases their estates’ extent and reduces the estate tax burden.
• Distribution of wealth. The FLP enables individuals to allocate their wealth to heirs using limited partnership shares. The worth of these shares is lesser than that of the assets retained by the FLP since their assessed value is discounted because of factors like their marketability limitations.
• Reduction of gift tax. After assets are transferred into the FLP, the general partners can make use of the yearly gift tax exclusion to carry out a progressive transfer of the FLP’s interests to their children and/ or grandchildren. Provided that the worth of the limited partnership shares sets upon the yearly gift tax exclusion limit, the distributions are not going to be subject to gift taxes.
• Reduction of income tax. Being a limited partnership, the FLP is taxed on a “pass-through” basis. Meaning the FLP is not subjected to taxes itself. Rather, its income and forfeitures are passed on to the general and limited partners in expanse equal to their interest in the FLP. Therefore, the FLP takes advantage of the generally lower tax bracket of its limited partners. For instance, a child that is going to college is going to likely be in a lower tax bracket than their parents and are going to pay a decreased income tax.

Family limited partnership drawbacks

Whereas the FLP offers a lot of benefits, certain drawbacks may make it improper for your estate planning needs:

• Difficulty. Because of the Difficulties in structuring the FLP, it’s often necessary to retain the services of experienced professionals. This isn’t limited to an estate planning attorney with knowledge in FLPs. Other professionals that might need to establish and maintain the FLP include tax professionals and assessors.
• It’s a business. The FLP remains, at the end of the day, a business, and several important issues arise from this. Since the FLP is a business, it may not be the proper means for ownership of personal assets. And in order to maintain its authenticity as an FLP, the FLP must be run meticulously, like you would run a business.
• Costs. Keeping the various professional services required to set up and operate the FLP and maintain its authenticity can be costly. You may find the total expense’s restrictive compared with the FLP’s estate planning benefits.

To establish if the FLP is the right means for your estate planning needs, consult with legal and tax professionals with knowledge in structuring FLPs.

Source:

1. FLP: What is a family limited partnership and how can it save your family money? LegalZoom. (n.d.). Retrieved March 1, 2023, from https://www.legalzoom.com/articles/flp-what-is-a-family-limited-partnership-and-how-can-it-save-your-family-money

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