For families in search of ways to protect their assets, there are so many different tools and strategies available that it can sometimes be difficult to sort through all of the possible options. That process can be even more challenging for more affluent families that have concerns that go beyond just figuring out how to pass on assets to heirs. Many of those families have concerns about estate tax ramifications or other tax obligations. And while some estate planning strategies emphasize various gifting plans to reduce the value of an estate and give heirs their inheritance early, many people are unwilling to go to that extreme and relinquish control over any sizable portion of their estates. The good news is that a Family Limited Partnership (FLP) can sometimes be the ideal solution for protecting assets in these types of situations.
What is an FLP?
A Family Limited Partnership is a type of Limited Partnership that most businesspeople will readily understand. It offers something similar to the type of indirect ownership that businessmen and women undertake when they create legal entities like a corporation or Limited Liability Company to structure their business holdings. Those business types provide them with the ownership and control they need, while also maintaining just enough legal separation between themselves and their business interests to protect them from personal liability in a number of critical areas.
With an FLP, the family members enter into a partnership that includes two distinct levels of interest. Members can be either general partners or limited partners, and each one has its own particular level of authority, responsibility, and liability. Those members who enjoy general partner status are invested with all of the authority over both investment and management decisions, and they also bear all of the partnership’s legal liability. The limited partners have no management authority in the partnership, but they also bear no liability.
It is not uncommon for affluent families to create these partnerships with the most senior partners – parents, for example – placing their assets into the legal entity and receiving general partnership and limited partner interests. As a general rule, most of their interest comes in the form of limited partnership, and they then give some portion of those interests to their heirs – sometimes immediately, and other times by way of a trust. This then creates a situation in which the asset’s original owners still maintain controlling interest in the assets and all of the liability, but divide up the limited partner interest among their heirs.
What’s The Point?
For most families, the main reason for creating a Family Limited Partnership is to enjoy the tax protections that this legal entity can provide. Unlike trusts, FLPs are not taxable in their own right. With this type of arrangement, each member of the partnership is responsible for reporting income – as well as deductions – on his or her personal tax returns. Moreover, partners are only required to report a portion of the FLP’s income that is in direct proportion to their share of interest in the Partnership.
The real benefits available to those families using the FLP structure are pretty impressive, to say the least. They include the following:
- By transferring assets into the partnership, the senior members of the family are often able to substantially reduce the size of their estate – which reduces that estate’s tax liability and can in many instances reduce or even eliminate estate tax worries.
- At the same time, those senior members still have the opportunity to maintain control over those assets while they are still alive.
- FLPs are flexible, so the owners can actually make needed changes to the agreement any time the family’s needs change – something that is sure to happen in any family as deaths, new births, marriages, and other life-changing events occur.
- When the senior members transfer their limited partner interests to their heirs, those transfers are still considered to be eligible gifts that meet the requirements for the gift tax exclusion – thanks to legal provisions that enable the value of those transfers to be discounted.
- The FLP can be a great way for people to secure the value of their estate against their heirs’ future creditors. Those creditors cannot get at the partnership’s assets unless the general partners agree to allow access.
- The Family Limited Partnership can also offer cost savings for investment fees, since the entire family can make use of a single brokerage account.
Are There Drawbacks?
Of course, the FLP is not a miracle option. Like every estate planning tool, it has its weaknesses and drawbacks. For instance, you cannot grant limited partner interests to minor children. Instead, you have to rely on their parents to manage their shares. In addition, these partnerships are not fit vehicles for every single type of asset that you might own. Many securities, residential properties, and similar assets are often ill-suited for inclusion within the partnership’ asset portfolio. Moreover, it can be expensive to set up an FLP, since assets need to be appraised and transferred – and that can cost money.
In short, this is not the type of strategic move that you should make on your own, because mistakes can be costly. To maximize the benefits and ensure that there are no hidden costs or dangers, you need the assistance of professionals well-versed in these types of legal arrangements. And that, of course, means that you need the help of experienced estate planning attorneys who can guide you through these complex matters and ensure that your interests are protected every step of the way.
The attorneys at Biddinger, Bitzer & Estelle, PLLC understand that there are times when you need a more creative approach to asset protection. We can work with you to determine whether the FLP will work for your needs, helping you to maintain control over your assets in a way that provides your heirs with important partnership interests and protection from potential creditors. To find out more, contact us at our website or call us today at (989) 872-5601.