Owning your own business or investment portfolio can be incredibly rewarding. However, to preserve the fruits of your labor and dedication, you must do everything you can to protect it. Whether you seek to protect yourself, your investments, and your family from taxes, creditors, or probate, a family limited partnership (FLP) is a strategy worth considering.
What is a family-limited partnership?
An FLP is an entity owned by two or more family members, created to hold the accounts, properties, or businesses that are owned by one or more of the family members. An FLP has at least one general partner who is responsible for the management of the partnership, has unlimited liability, and is compensated by the partnership for their work according to the partnership agreement. An FLP also has one or more limited partners who are permitted to vote on the partnership agreement and are not authorized to manage the partnership. The limited partners receive the income and profits of the partnership and have no liability. Often, one or both parents are general partners because they contribute accounts, properties, or a business they own to the FLP and want to retain control of them as they transfer them to the next generation. To facilitate this transition, the children are given limited partnership interests while the parents retain general partnership interests.
What are the benefits of using an FLP?
This estate planning strategy is useful for the following reasons:
- An FLP can help protect accounts, properties, and businesses in the entity from your and your family’s creditors because those items are not owned by you and your family as individuals but instead are owned by the entity. If a creditor obtains a judgment against you or your family for a claim not related to the FLP, it can be difficult for the creditor to access anything that the FLP owns to satisfy that claim.
- Because of its lack of control and restrictions on selling a partnership interest, the value of the limited partnership interest that you give to a family member can be discounted, allowing you to maximize your annual gift tax exclusion and lifetime estate and gift tax exemptions.
- Transfer of partnership control can occur slowly, minimizing transfer taxes, allowing you to maintain control, and giving your family a share of the income and profits. Your family can take time to become more familiar with the business. Meanwhile, they will not be exposed to the partnership’s liabilities.
- If you own real property in a different state, transferring ownership of the property to the FLP allows your loved ones to avoid an ancillary probate proceeding at your death because the entity will own the property, not you.
What are the downsides of using an FLP?
While there are several benefits to using an FLP, there are a few disadvantages that must be considered:
- An FLP must have at least one general partner that will have unlimited liability for the partnership’s debts and obligations.
- An FLP is a business entity, so the formalities of operating a business must be observed, including holding regular meetings, keeping track of minutes, and paying the general partner appropriate compensation.
- If you want to give a limited partnership interest to a minor, additional planning may be needed to make sure that the interest is held either by a trust for the minor’s benefit or in a Uniform Transfer to Minors Act account.
- The creation and management of an FLP is a sophisticated planning strategy that requires experienced professionals and continued management by involved parties.
Could this be the best solution for you?
If you have a business or investment portfolio that you want to plan for, we would love to discuss ways you can pass it on to the next generation while protecting your life savings, minimizing taxes, and maintaining control for as long as you want. To discuss this strategy and create a unique plan to protect you and your family, please give us a call.