Family Limited Partnerships (FLPs) are a type of business entity that can be used to transfer assets between family members while also providing tax benefits. In this article, we will discuss what FLPs are, how they work, and their potential advantages and disadvantages.
What is a Family Limited Partnership?
A Family Limited Partnership is a type of partnership where the general partner(s) manage the assets held by the partnership, while limited partners have an ownership interest in the partnership but do not have management control over its assets. This structure allows family members to pool their resources together and jointly own income-generating assets such as real estate or businesses.
The general partner(s) typically consist of one or more family members who have management control over the partnership’s assets. The limited partners are usually other family members who invest in the partnership but do not participate in its day-to-day operations.
How do Family Limited Partnerships Work?
To create an FLP, one or more individuals must first establish a general partnership by filing a certificate of limited partnership with their state government. Once established, they can then transfer ownership of their assets into the FLP and designate themselves as the general partner(s).
As part of this process, they would also sell “limited partnerships” to other family members who wish to invest in the FLP. These limited partnerships give them an ownership interest in the FLP but no control over its management or operations.
The general partner(s) retain full control over managing all aspects of the FLP’s finances and investments. They receive compensation for their services as well as any profits generated by those investments.
What Are The Advantages Of Using A Family Limited Partnership?
1. Asset Protection: One major advantage of using an FLP is asset protection from creditors. By transferring assets into an FLP, these assets become protected from individual creditors seeking payment for personal debts because only shares in a company can be seized rather than specific pieces of property.
2. Tax Benefits: Another potential advantage of using an FLP is the ability to minimize estate and gift taxes. The value of limited partnership interests in the FLP are discounted due to their lack of control over management, which can reduce their taxable value for estate and gift tax purposes.
3. Facilitation Of Succession Planning: FLPs can also facilitate succession planning by allowing older family members to transfer ownership and management responsibility to younger generations while still retaining some control over the assets held by the partnership.
4. Avoidance Of Probate: An additional benefit is that heirs often avoid probate when assets are transferred into an FLP, thereby simplifying the process of transferring wealth from generation to generation.
5. Business Continuity: Finally, using an FLP ensures business continuity because it allows for a smooth transition between generations with minimal disruption in operations or loss of key personnel who have long-standing relationships with clients or vendors.
What Are The Disadvantages Of Using A Family Limited Partnership?
1. Complexity And Expense: Creating and managing an FLP requires significant legal and accounting expertise, which can be costly for many families.
2. All Partners Must Be Family Members: As its name implies, all partners must be related by blood or marriage, which restricts participation in the partnership to only those within a specific family unit.
3. Lack Of Control For Limited Partners: Limited partners do not have control over how funds are invested or what decisions are made regarding business operations since they cannot take part in voting on these matters without approval from general partners who hold majority control over investment decisions
4. Possible IRS Scrutiny – While there is no guarantee that creating an FPL will result in scrutiny from the IRS but it’s possible as this structure has been used by some individuals as a means to evade taxes so ensure you fully understand tax laws before proceeding
Conclusion:
Family Limited Partnerships offer several advantages for families looking to transfer assets between generations while also providing asset protection and tax benefits. However, the complexity and expense of creating and managing an FLP may be prohibitive for some families. Additionally, all partners must be related by blood or marriage, which can limit participation in the partnership.
Before considering an FLP as part of your family’s wealth management strategy, it is important to consult with experienced legal counsel and financial advisors who can help you determine if this structure is right for your family.