Family Limited Partnerships are financial tools used by those with considerable wealth. They’re controlled by the family with the goal of better protecting their wealth. They’re often preferred over a traditional LLP distinction for a few reasons as they appear to be better choices for avoiding estate taxes.
It’s not been that long ago that family limited partnerships, or FLPs, were used rarely and were misunderstood by many. Now, though, they’re a powerful estate planning tool that can benefit the entire family when used properly and legally.
Because of recent changes to the laws – and more anticipated in the coming years – they’ve found a place in the forefront of preferred protective mechanisms. That’s not to say, though, that they don’t come without problems. Still, they remain a viable strategic option for many. We explore those options below.
One of the biggest reasons they’ve become the choice shelter is because creditors can now foreclose easily on limited partnerships, or LLPs as they’re sometimes referred to, and this means more were looking for safer options. Enter the FLP. It’s the ideal asset protection and there have been several court cases that support that as FLPs have consistently proven the better choice for significant protections and tax benefits.
These are set up much the way a traditional company is with the general partners controlling the decisions. Investments become more of a family affair, though it’s the general partners who shoulder the burden of the liabilities from a financial stance.
Meanwhile, the limited partners act in many ways as what we think of as “silent partners”. They’re members of the family, but their role is far less than others and their risks and liabilities are considerably lower as well. Often these are younger or considerably older family members.
Family Limited Partnerships Not Perfect
FLPs come with their own risks, though they are decidedly far less than other options. They can provide impressive protections, and they’re easily modified as the needs of the families shift. Even though there are no immediate tax costs, the general partners must break it down on their personal tax returns, which can place a heavy burden on them. That said, those same general partners aren’t hindered by the decisions of others in the FLP. They can make all of the decisions, regardless of what other family members wish.
If the general partners are carefully chosen and if there is an equal balance in terms of liabilities, an FLP can be perfect choice for financial planning. We all want to ensure our children have something to look forward to and right now, FLPs are that vehicle of choice. By sharing ownership, there are usually no overwhelming financial burdens placed on any one family member and each is able to provide for his or her own family. The values are decided exclusively by the general partners, so it makes sense that siblings and even cousins are co-general partners.
A Family Affair
Is a family limited partnership right for your specific situation? We encourage you to give us a call and discuss the various Vermont laws that dictate the way these tax shelters perform. We can guide you through the legalities, risks and benefits of FLPs so that you’re making the best decisions when it comes to protecting your family’s wealth. We know the changes and nuances in the laws and we’re on top of what lies ahead for families in Vermont.