Family Limited Partnerships (FLPs) are a sophisticated estate planning tool that can be used to
transfer assets to family members while minimizing estate and gift taxes. This article explores how
FLPs work and their potential benefits for wealth transfer.
Understanding Family Limited Partnerships (FLPs)
A Family Limited Partnership (FLP) is a limited partnership formed by family members to hold and
manage assets, often including:
- Real estate
- Family businesses
- Investments
How a Family Limited Partnership Works
- Formation: The family creates a limited partnership. Typically, older generations act as general partners (GPs) and younger generations as limited partners (LPs).
- Asset Transfer: Assets are transferred into the FLP.
- Control and Management: General partners manage the partnership and its assets.
- Income and Distributions: Income generated by the assets is distributed to the partners according to the partnership agreement.
- Transfer of Ownership: Limited partnership interests can be gifted or transferred to family members.
Benefits of Family Limited Partnerships
- Estate Tax Reduction: Gifting limited partnership interests can reduce the value of your estate, potentially lowering estate taxes.
- Gift Tax Reduction: Valuation discounts may apply when gifting limited partnership interests.
- Asset Protection: FLPs can offer some protection from creditors.
- Control Preservation: General partners can retain control over the assets even after transferring ownership.
- Family Unity: FLPs can facilitate family involvement in managing assets and preserving family wealth.
Key Tax Benefits
1. Valuation Discounts
When gifting limited partnership interests, valuation discounts may be allowed due to:
- Lack of Marketability: Limited partnership interests are not as easily sold as publicly traded stocks.
- Lack of Control: Limited partners have limited control over partnership decisions.
2. Estate Tax Reduction
By transferring assets out of your estate, you can potentially reduce the estate tax burden on your heirs.
Example
A family forms an FLP to hold a family-owned business. The parents act as general partners and
their children as limited partners. Over time, the parents gift limited partnership interests to
their children. This reduces the value of the parents’ estate, potentially lowering estate taxes,
and the children receive ownership in the business.
Important Considerations
- IRS Scrutiny: The IRS closely scrutinizes FLPs, and they must be structured and operated properly to achieve tax benefits.
- Business Purpose: FLPs should have a legitimate business purpose beyond tax avoidance.
- Legal and Accounting Expertise: Setting up and managing an FLP requires legal and accounting expertise.
- Complexity: FLPs can be complex and involve ongoing administrative requirements.
- Family Dynamics: Consider the potential impact on family relationships.
Conclusion
Family Limited Partnerships can be a valuable tool for wealth transfer, offering potential tax
benefits and facilitating family involvement in asset management. However, they are complex and
require careful planning and professional guidance to ensure compliance and achieve desired
outcomes.
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avoidance, family business, limited partnership, asset protection.
Frequently Asked Questions (FAQ)
1. What is a Family Limited Partnership (FLP)?
A Family Limited Partnership (FLP) is a limited partnership formed by family members to
hold and manage assets.
2. What types of assets are commonly held in an FLP?
Common assets include real estate, family businesses, and investments.
3. Who are the general partners (GPs) in an FLP?
General partners manage the partnership and its assets. Typically, older generations
serve as GPs.
4. Who are the limited partners (LPs) in an FLP?
Limited partners have limited involvement in management. Typically, younger
generations are LPs.
5. How are assets transferred into an FLP?
Assets are transferred from the family members who currently own them into the
newly formed FLP.
6. What are the tax benefits of using an FLP?
Tax benefits include potential reductions in estate and gift taxes through
valuation discounts.
7. What are valuation discounts in the context of FLPs?
Valuation discounts are reductions in the assessed value of limited partnership
interests due to lack of marketability and lack of control.
8. What is the IRS’s stance on FLPs?
The IRS closely scrutinizes FLPs, and they must be structured and operated
properly to achieve the intended tax benefits.
9. What are the key considerations before forming an FLP?
Key considerations include having a legitimate business purpose beyond tax
avoidance, seeking legal and accounting expertise, and considering the impact on
family relationships.
10. Are FLPs suitable for all families?
FLPs can be a valuable tool for some families, but they are complex and require
professional guidance. Their suitability depends on individual circumstances and
estate planning goals.
