Unfortunately, family limited partnerships in Vermont, or FLPs, have gotten a bad rap in recent years. Some insist they’re golden opportunities for the IRS to audit while other say they’ve become abusive methods of transferring wealth with no tax repercussions. But even if that’s true, and we’re not saying it is, there are many benefits to these financial planning options. Perhaps the real downside has to do with the family dynamic itself.
Keeping it in the Family
First things first – before you can even begin to benefit from an FLP, you have to deal with the “F” part of the equation – the family. It’s a slow waltz and those who treat it like a feisty two-step are bound to be disappointed, or worse, in a failing business. If you can put the parameters into place beforehand, you’ll have a better chance at success and a more realistic plan for the future going into your FLP.
Family Limited Partnerships and Transparency
A few questions that need solid and unwavering answers, both to your family as well as your small business planning professional, includes:
Who owns the business, who do the owners envision as future owners and how are those decisions going to be made?
Let’s say you have two sons. One’s been married three times and tends to not know his alcohol limits. The other has been married for a dozen years, is well into his mortgage and is financially responsible. No one needs to spell out the potential problems in this scenario. What you need to ensure, though, is that you’ve addressed it in its totality with your family. If you’re unsure, it might not be the best time to go into a family owned business.
What about the daily management efforts? Who takes over when you aren’t there? Will you choose someone outside the family? And what decision making role will they play?
Ownership is one thing, but what about control? Who will have voting rights? Who, if anyone, will remain more of a silent partner?
And asset protection? Capital gains tax considerations? Wealth preservation? Retirement options for employees? Lawsuits? Creditors? These are all important questions – not just for setting up a business, but for purposes of defining that business as you’re setting up your FLP (and determining things like irrevocable trusts as the partner), but you need to be thinking about it now.
How the Family Limited Partnerships in Vermont Work
Parents, or older members of the family, take a stake in the company as general partners. They then begin gifting various interests – always limited – to their children, who will end up with the vast majority of the business, presumably tax-free. This can benefit the business as a whole as well as the business owners, but there are reasons why many re-think these as viable options.
As mentioned, the IRS tends to not like them and often sees them as justification for audits. If changes are made via “deathbed” (changes made hours or days before a family member passes), you can expect to hear from the IRS. In recent years, there have growing calls for Congress to significantly limit FLPs.
Ultimately, your best bet is going to be to discuss all of your FLP options with your legal representation. In Vermont, the laws are clear and the right family wealth attorney can help clear the way for much success in your family owned business.
Stephen Unsworth
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