A family limited partnership (FLP) is a special type of partnership agreement between family members which allows members of the family to share in ownership and control of business or investment assets. Family limited partnerships can be used to facilitate the transfer of a company or assets, to provide some liability protections, and to reduce potential estate taxes after a death.
The decision on whether to create a family limited partnership or not is a complicated one. There are substantial advantages to family limited partnerships under the right circumstances, but there are also disadvantages and this type of partnership situation is not the right choice for every situation.
Unsworth LaPlante, PLLC can provide assistance in determining if a family limited partnership is the right choice for you and can also help you to understand some of the other estate planning and business succession tools that you may be able to use either instead of or in addition to a family limited partnership.
What is a Family Limited Partnership?
According to Investopedia, a family limited partnership is “A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family’s assets into one single family-owned business partnership that family members own shares of.”
The FLP is generally created by parents, who will form a formal partnership in accordance with state requirements. Like all limited partnerships, there will be general partners who manage the partnership and who can face liability risks and limited partners who do not participate in the daily management of the partnership and whose risk of loss is limited to investments in the partnership.
When the partnership is created, typically the general partners who created it will contribute assets, like investments or ownership of a business and its assets. The children, grandchildren, or others who the general partners want to share wealth with, are given ownership interests in the FLP as limited partners. The ownership interests given to heirs may be given directly to the children, grandchildren, or other relatives, or may be put into a trust.
If the value of the interest in the general partnership that is given to heirs each year is kept below the threshold for triggering gift taxes, no tax is assessed. Since interest in the business or investments gradually transfers to heirs over time using this method, the value of the taxable estate which the general partners would otherwise have left to children at their death is significantly reduced. This means that estate taxes could be avoided or could be eliminated.
Should You Create a Family Limited Partnership?
Many people decide to create a family limited partnership because their goal is to avoid estate tax. An FLP can be very good at that, and estate taxes could be avoided entirely if the value of the estate is reduced enough by the annual gifts given to heirs.
Income taxes can also be reduced when children are included as company partners and partnership income is shared with them. However, it is important to understand limitations on shifting income to children under the age of 14, as shifting substantial amounts of money to children can result in that income being taxed at the top marginal rate of the parents.
There are also some downsides associated with the creation of a family limited partnership. One of the biggest downsides is that children can face substantial capital gains liability, as property which is gifted does not receive stepped-up basis treatment as property does when it is bequeathed. Substantial capital gains can also result if the FLP is considered an investment company.
General partners also face liability risks and are not protected from possible creditor claims, lawsuits, or judgements. Finally, transferring ownership of an interest in a FLP to children under 18 can be complicated. You should discuss these downsides with an experienced attorney to make sure a family limited partnership is truly right for you.
Getting Help with a Family Limited Partnership
Unsworth LaPlante, PLLC can advise you on whether a family limited partnership is a good choice for you or not, and can provide you with guidance on the process of creating an FLP. Our legal team can also discuss many other options for asset protection, business succession, and estate tax avoidance or reduction.
To learn more about the key estate plan and business succession options available to your family, you can download our free estate planning worksheet. You can also give us a call at (802) 879-7133 or contact us online to speak with an experienced member of our legal team who can offer personalized advice about the use of a family limited partnership to accomplish your goals.