Family Business Estate Planning: Establishing a Family Limited Partnership

Posting by Billy Thomas, CPA

In estate planning, families are presented with many financial challenges: asset control, asset protection, ensuring the financial literacy of future generations, and maintaining wealth for future generations. In certain cases, a Family Limited Partnership (FLP) is a helpful estate planning tool to address and provide for those concerns.

What is a Family Limited Partnership?

Organized under state law, a Family Limited Partnership is simply a limited partnership in which the partners happen to be a closely related group, the family. In order for a limited partnership to be considered a family partnership, it must meet all state and federal tax law requirements: the partnership must demonstrate good faith in operating a business together while each partner (limited or general) must own a capital share of the income-producing assets. The family owners can include the spouse, ancestors, lineal descendants and certain trusts with a primary benefit to the family members.

Family Limited Partnership Asset Consolidation

The creation of a Family Limited Partnership allows for the consolidation and combination of a variety of family assets under the umbrella of the partnership. Assets can include an operating family business or, in many cases, the investment assets (marketable securities, real estate, etc.) of the family. In this way, an FLP can provide efficient cost savings on asset management. Family Limited Partnership Asset Protection While many estate planning techniques limit or relinquish control through irrevocable trust agreements, an FLP allows for the element of control over the management of these assets. By establishing an FLP, the parents, as general partners, fund the partnership with property or investments and maintain a management role.

Control over the assets of the Family Limited Partnership means having the right to control cash flow and investment management over the assets in accordance with the drafted partnership agreement. It can also allow for buy-sell agreements to require other family members/partners the first right of refusal to sell certain family assets where appropriate, furthering the retention over long-lived family assets. Plus, this partnership agreement is a fluid document, which can be changed as needed to incorporate the changing needs of the family.

Family Involvement in Financial Decisions

An FLP allows parents to work with their children and grandchildren to determine how the family may wish to preserve wealth. Is it to hold real estate or simply investments, like stocks and bonds? This strategy helps to instill the concept of “family money” into younger generations and encourages the preservation of wealth for future generations to come. Holding regular family meetings as partner meetings and encouraging participation will also help to foster a sense of ownership and commitment to the family, leading to a prosperous family legacy with strong values.

A Family Limited Partnership and Gifts

Beyond the partnership management and asset control, the Family Limited Partnership is a unique tool in the estate planner’s strategy guide. Through an FLP, partnership interest can often be valued and gifted at a discounted rate for lack of marketability and lack of control.

Gifts of Family Limited Partnership interest can simplify annual gift giving. These gifts are valued at the discounted amount of something less than fair market value for transfer tax purposes. Lack of marketability takes into account the fact that it may be difficult to find a willing buyer within a family LLC, while lack of control takes into account the fact that the transferred interest may not provide total control over the partnership assets.

It is important to note that this lack of control also assists in the asset protection element of the Partnership. When the Family Limited Partnership agreement is written well, creditor protection and divorce protection can be achieved for all partners. The creditor protection provides an added level of security and retention of the family’s assets and wealth and protects them from unwelcome parties.

Establishing a Family Limited Partnership

As mentioned earlier, the creation of a Family Limited Partnership must adhere to not only federal laws, but state laws. Each state will have its own provisions guiding the formation of businesses operating in the state and more information regarding the creditor protection available to members of the partnership.

A Family Limited Partnership can be an excellent tool for families to manage, control and maintain their assets for future generations. While there are many benefits to establishing an FLP – from transferring wealth to incorporating financial learning opportunities for future generations – the Family Limited Partnership is a complex business entity requiring the guidance of an educated professional knowledgeable in not only partnership tax law, but also estate tax law, and should be entered into with great care and planning.

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