A Family Limited Partnership (FLP) is an important vehicle in many estate plans. Family Limited Partnerships are so named because the ownership is typically limited to members of the same family unit. The main benefit is that financial interests may be transferred to others at a discounted value, while the original owner maintains management and control of the assets. This is particularly important when the intended heirs may lack the business skills or maturity to manage the assets. During the term of the FLP, parents can educate their children about managing the assets before relinquishing control. Retaining the business within the family can be controlled by restricting each partner’s ability to sell or transfer their interests to non-family members.
When an FLP is established, the owners of the assets receive both a general and limited partnership interest in exchange for the assets. Typically, 99% of the interests are in the form of limited partnership interests which carry most of the economic value. The other 1% is issued as a general partnership interest, which only carries voting rights and allows the original owner to maintain control. Over time, the limited partnership interests are gifted or sold to children or other partners.
Since there are restrictions on the control and sale of the assets by the partners, the IRS permits the value of the limited partnership interests to be discounted for the purpose of transfer (gift) tax purposes. The greater the discount, the greater the annual gift allowed which may qualify for the annual gift exclusion depending on the terms of the partnership agreement. For example, if the discount were 20%, an annual gift exclusion of $12,000 would allow the transfer of $15,000, without any gift tax implication. Another major benefit of an FLP is that it allows for a more efficient transfer of ownership than direct giving.
During the FLP’s existence, the assets held within this entity may generate income and expenses. The net income passes through to the partners based on their ownership percentages. FLPs also provide a limited degree of protection for assets of the partnership since creditors cannot attach these assets to satisfy personal debts of the limited partners.
Depending upon the state in which the entity is formed, you may wish to have your professional legal advisors determine whether a limited liability company should be established instead.