Family Limited Partnerships: A Comprehensive Guide
Definition
Key Facts
- Definition: A family limited partnership is a partnership among family members where general partners control the business and limited partners have limited liability and no management responsibilities.
- Purpose: FLPs are commonly used for wealth preservation, estate planning, and minimizing taxes. They can help reduce estate tax liability, protect assets from creditors, and provide flexibility in managing family-owned assets.
- Structure: In an FLP, family members act as general partners or limited partners. General partners have unlimited liability and control over administrative and investment decisions, while limited partners have limited liability and no management responsibilities.
- Taxation: FLPs are not taxable entities themselves. Instead, the owners of the partnership report income and deductions on their personal tax returns based on their ownership interests.
- Asset transfer: FLPs allow for the transfer of ownership interests in family-owned assets to other family members. This can be done through lifetime gifts or transfers at death, potentially qualifying for discounts on the value of the transfers.
- Asset protection: FLPs can provide protection from creditor claims and former spouses. Creditors generally cannot force distributions or own a limited partner’s interest without the approval of the general partners. After a divorce, the partnership agreement can mandate the transfer of the limited partner’s interest back to the family for fair market value.
A family limited partnership (FLP) is a legal structure that allows family members to jointly own and manage family-owned assets. It is a type of limited partnership where general partners retain control over management and investment decisions, while limited partners have limited liability and no management responsibilities (Legalzoom, 2024; Justia, 2023).
Purpose
FLPs are commonly used for wealth preservation, estate planning, and minimizing taxes. They can help reduce estate tax liability, protect assets from creditors, and provide flexibility in managing family-owned assets (Justia, 2023).
Structure
In an FLP, family members act as general partners or limited partners (Legalzoom, 2024; Justia, 2023). General partners have unlimited liability and control over administrative and investment decisions, while limited partners have limited liability and no management responsibilities.
Taxation
FLPs are not taxable entities themselves. Instead, the owners of the partnership report income and deductions on their personal tax returns based on their ownership interests (Justia, 2023).
Asset Transfer
FLPs allow for the transfer of ownership interests in family-owned assets to other family members. This can be done through lifetime gifts or transfers at death, potentially qualifying for discounts on the value of the transfers (Justia, 2023).
Asset Protection
FLPs can provide protection from creditor claims and former spouses. Creditors generally cannot force distributions or own a limited partner’s interest without the approval of the general partners. After a divorce, the partnership agreement can mandate the transfer of the limited partner’s interest back to the family for fair market value (Justia, 2023).
References
- Legalzoom. (2024, January 22). Pros and cons of creating a family limited partnership. Retrieved from https://www.legalzoom.com/articles/pros-and-cons-of-creating-a-family-limited-partnership
- Justia. (2023, October). Family limited partnerships & legal implications for estate planning. Retrieved from https://www.justia.com/estate-planning/asset-protection/family-limited-partnerships/
- Arnold & Smith, PLLC. (n.d.). Pros and cons creating a family limited partnership. Retrieved from https://www.arnoldsmithlaw.com/pros-and-cons-creating-a-family-limited-partnership.html
FAQs
What is the difference between a family limited partnership (FLP) and a trust?
FLPs and trusts are both legal structures that can be used for estate planning and asset protection. However, there are some key differences between the two. FLPs are partnerships, while trusts are legal entities that are created by a grantor to hold and manage assets for the benefit of beneficiaries. FLPs have both general partners and limited partners, while trusts typically have a trustee who manages the assets. FLPs are not taxable entities, while trusts can be either taxable or non-taxable depending on their structure.
Can a family limited partnership be used to avoid estate taxes?
Yes, FLPs can be used to reduce estate taxes by transferring ownership interests in family-owned assets to other family members. This can be done through lifetime gifts or transfers at death, potentially qualifying for discounts on the value of the transfers.
Do family limited partnerships provide asset protection?
Yes, FLPs can provide protection from creditor claims and former spouses. Creditors generally cannot force distributions or own a limited partner’s interest without the approval of the general partners. After a divorce, the partnership agreement can mandate the transfer of the limited partner’s interest back to the family for fair market value.
Are family limited partnerships complex to set up and maintain?
Yes, FLPs are complex legal structures that require careful planning and drafting. It is advisable to consult with an estate planning attorney to ensure that the FLP is properly established and maintained.
Are family limited partnerships subject to the generation-skipping transfer tax (GST)?
Yes, FLPs are subject to the GST if the partnership interests are transferred to grandchildren or other generations that are more than one generation below the grantor.
Can a family limited partnership be used to hold real estate?
Yes, FLPs can be used to hold real estate. This can be beneficial for families with significant real estate assets, as it can help to reduce estate taxes and protect the assets from creditors.
Are family limited partnerships recognized in all states?
Yes, FLPs are recognized in all states. However, the laws governing FLPs vary from state to state. It is important to consult with an estate planning attorney in your state to ensure that the FLP is properly established and maintained.
Are there any disadvantages to using a family limited partnership?
Yes, there are some disadvantages to using a FLP. FLPs can be complex and expensive to set up and maintain. They can also be subject to challenge by the IRS if they are not properly structured and maintained.