As a business owner or investor, it’s important to safeguard the fruits of your hard work and dedication. One strategy to consider is creating a family limited partnership (FLP) which can provide protection from taxes, creditors, and probate for you, your investments, and your loved ones.
What is a family limited partnership?
A family limited partnership (FLP) is a legal entity owned by multiple family members, and used to hold assets such as properties, businesses, and accounts. The FLP has a designated general partner who manages the partnership and is compensated for their work, but also has unlimited liability. Limited partners, on the other hand, do not manage the partnership but are allowed to vote on the partnership agreement and receive the income and profits of the partnership without any liability.
It is common for parents to be the general partners, as they usually contribute assets they own and want to maintain control over them while transferring them to the next generation. This can be done by giving the children limited partnership interests while the parents retain the general partnership interests.
What are the benefits of using an FLP?
A family limited partnership (FLP) can be an effective estate planning strategy for several reasons:
- By placing assets such as properties, businesses, and accounts in the FLP, they are protected from creditors, as they are not owned by individuals but by the entity.
- Giving a limited partnership interest to a family member can be discounted, maximizing the annual gift tax exclusion and lifetime estate and gift tax exemptions.
- Transferring control of the partnership can be done gradually, minimizing transfer taxes, allowing for maintaining control and providing the family with income and profits. This also allows them to become familiar with the business without being exposed to its liabilities.
- For individuals who own real property in different states, transferring it to FLP can avoid ancillary probate proceedings as the property is owned by the entity and not by the individual.
What are the downsides of using an FLP?
While a family limited partnership (FLP) offers many benefits, there are also some downsides to consider:
- The FLP must have at least one general partner with unlimited liability for the partnership’s debts and obligations.
- The FLP is a business entity, so it must observe formalities like holding regular meetings, keeping track of minutes, and paying the general partner appropriate compensation.
- If a limited partnership interest is to be given to a minor, additional planning may be required to ensure that the interest is held either by a trust or in a Uniform Transfer to Minors Act account.
- Creating and managing an FLP is a complex strategy that requires the expertise of experienced professionals and ongoing management by all involved parties.
Could this be the best solution for you?
If you’re looking to plan for your business or investment portfolio with an eye toward passing it on to future generations while also protecting your savings, minimizing taxes, and retaining control, we would be happy to talk with you about how a family limited partnership (FLP) can help. Let’s schedule a call to discuss your specific needs and create a tailored plan to safeguard you and your loved ones.