There are many ways to manage wealth and protect family assets, from trusts to charitable foundations to various legal entities. One method exclusive to families is a family-limited partnership or FLP. An FLP is a limited partnership in which family members pool resources for business purposes. They then reap a profit from the business in the form of dividends.
Structure of an FLP
Unlike other forms of limited partnerships, an FLP has two types of partners: general partners and limited partners.
A general partner has control over all management and investment decisions. They can receive income from management fees (per the partnership agreement) as well as from their shares in the business. They handle the management responsibilities of the partnership, which include overseeing investments, transactions, and deposits. General partners typically own the highest proportion of the partnership, but they also take on the full liability.
A limited partner, on the other hand, has no liability from the partnership, but they don’t make management decisions. They gain income through the shares they buy in the partnership as the business generates interest.
One of the applications of an FLP is to pass wealth down to one’s children. This is done by passing on interest from the partnership on to family members. As long as this amount comes below the annual gift tax exclusion, this gift is tax-free.
As of 2018, the gift exclusion is $15,000 ($30,000 for married couples). This amount applies to each individual, so if a married couple in the FLP gifts to six children, they can gift $30,000 times six each year, or $180,000. Since this is tax-free, it helps preserve wealth as it’s passed down.
General partners in the FLP can set stipulations on how the funds are to be handled to keep them from being mismanaged, further helping to preserve wealth in the long term.
In addition, since they have no control over the partnership’s investments, a limited partner could claim a valuation discount for their dividends when they are transferred, which further helps reduce tax obligations.
Applications in Estate Planning and Asset Protection
These tax benefits can be highly beneficial for your estate plan. Being able to gift interest to other family members preserves wealth by passing it on to inheritors while also keeping your total estate below federal and state taxation limits.
In addition, the interest from the FLP can be placed in a trust, adding a further layer of protection from federal taxation and asset seizure.
Since the partnership is kept within family relationships, assets are protected from events such as divorce. When the partnership agreement is properly structured, shares held by a former spouse must be transferred back to the family. This prevents creditors from seizing assets as the result of a failed marriage or other family circumstances.
Of course, in order to be truly effective, a limited family partnership must be structured properly. The attorneys at Hart David Carson LLP can provide legal guidance when drafting the partnership agreement documents, so contact us if you feel that an FLP would be a good avenue for you to take.