If you own a small business, it is important to consider what will become of your business at the time of your death. When planning your estate, you must include a plan for distributing your business assets or for passing the business on to another party. Estate planning involving large corporations can become complicated; however, for small family businesses, there is an easy solution you can set up long before your death becomes an imminent concern.
What is a Family Limited Partnership?
Family Limited Partnerships, or FLPs, are state planning tools that allow you to protect your assets through a limited partnership or limited liability company. Assets are placed into these arrangements, and gifts of LP or LLC interest are made to family members, at a discount of the business value. While this is an excellent estate planning option, there are a few things to be aware of. Missteps could lead to misinterpretation of your intentions by the IRS, further leading to headaches you likely do not need. An experienced estate planning attorney can help you navigate through the process of establishing an FLP, ensuring that you understand how FLPs work and how to proceed without IRS interference.
Avoiding IRS and Probate Court Scrutiny
Do not form a Family Limited Partnership with the intention of making immediate gifts to your family. The IRS could view this as your having made gifts of the property contained in the FLP, rather than gifts of actual interest. There is no law forbidding you from doing so; however, your risk losing the benefit of interest discounts in the value of the gifts. Waiting to make the gifts subjects them to market risk, meaning the value may change based on current economic conditions, but waiting also eliminates the aforementioned IRS hassles.
You do not want to treat FLP assets as your own personal assets. The FLP should be an entity separate from your personal finances. Combining FLP assets with your personal assets will only invite the IRS and probate court to treat the FLP as a personal asset, potentially tying your personal finances into any fiduciary responsibility carried by the FLP upon your death.
- If establishing a Family Limited Partnership is on your estate planning agenda, there are a few additional tips that will pave the way for the formation of your FLP and disposition of your limited partnership or limited liability company assets:
- Form the LP or LLC entity, contribute property, assets, and money, but wait as long as possible before beginning to make gifts of interests to your family.
- Inheriting children should benefit from current ownership in the FLP. Therefore, your FLP Agreement should not be so restrictive as to limit their ability to benefit and to learn about business operations.
- Distributions should never go to parents alone if children are entitled to inherit interests. Set your distributions as pro rata instead.
- When operating an FLP, keep all books, record, bank accounts, etc., separate from your personal finances and assets.
- Have regular meetings in which partners and inheriting children (once old enough) participate.
Forming a Family Limited Partnership is a good option for protecting your small business assets through estate planning. It is never too early to plan ahead, so contact a knowledgeable estate planning attorney to assist you today.