Registered Investment Adviser
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FAMILY LIMITED PARTNERSHIP
A Family Limited Partnership (FLP) is the same as
a traditional business limited partnership, except is
structured to manage and hold assets of a family.
Reducing income and estate tax, transfer of
ownership without losing control and liability
protection are all potential benefits to setting up
an FLP.
Just as all limited partnerships, there are two
parties involved: “General Partners” which control
the partnership, and “Limited Partners” who have a
share in the profits, but hold no control. It is
important to structure an FLP, and operate the FLP
correctly. If certain business procedures are not
followed, the IRS or courts may rule that the FLP is
invalid, thus negating the benefits which were the
original motivation for setting it up.
Understanding the Two Types of Partners
The General Partners design the partnership to gift
Limited Partner shares to family members. General
Partners control the operations of the FLP and make
day-to-day investment decisions. They can also
receive a percentage of the FLP’s income in the form
of a management fee.
Limited Partners have an ownership interest in the
FLP, but they have very limited control. They share
in the income generated by the FLP, depending on
how many shares of the FLP they own. But, as far as
control goes, they have almost no say. When the
FLP is dissolved, a proportionate amount of FLP
property will pass to each Limited Partner.
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In the beginning, you and your spouse own both General Partner and Limited Partner shares.
Over time, you may gift to your heirs Limited Partner shares using your annual $13,000 gift
exclusion (2009) or use alternative estate planning techniques. Do not worry about giving away
too many of the shares. Based on current tax law, the General Partners may own as little as 1%
of the FLP’s assets and still retain control. That means you can still buy and sell assets,
dispose of property, and declare any distributions on FLP shares.
Leverage Your Estate Tax Credit
FLPs potentially can allow you to pass more value than the maximum Estate Tax Exclusion amount (In 2009
$3.5 million or $7.0million per couple). For instance, a gift of Limited Partnership shares worth $2 million, in
some cases, may be appraised at a substantially lower dollar amount. This is because the number of
shares gifted lack significant control and therefore cannot be sold to others for full value. In other words,
there is no “market” for Limited Partner shares. This lower appraisal is called “discounting” the value of
Limited Partnership units. But be careful not to discount too heavily, as this could raise the attention of the
IRS, and invalidate your FLP.
Possible Protection Against Creditors
Because of their lack of control, Limited Partner shares are very undesirable to creditors. Creditors will find
it difficult to seize Limited Partner shares, since they are not publicly traded.
Creditors also don’t want to pay tax on income they don’t receive. If the Partnership has earned income, but
the General Partner does not declare a distribution, each General and Limited Partner is required to report a
proportionate share of the earned income on his or her personal tax return, without actually receiving any
dollars with which to pay the tax. This creates “phantom income” for the Limited Partners.
FLiPs Offer Other Advantages Too
Another important feature of FLPs is that they are considered an “intangible asset.” Thus, chances are that
only the State in which in primarily reside will be able to impose any inheritance tax on Partnership units, as
well as avoid probate in those States. This is ideal for real property owners that own property in
several states.
Another Source of Retirement Income
FLPs, as mentioned before, can provide General Partners with a stream of income as a management fee.
This fee reflects the work you do as the General Partner to maintain the FLP as a working business, and
is considered earned income.
You may also draw income from your FLP through a Preferred Payment Provision. Such a provision could
allow you to allocate a predetermined amount each year from the Partnership’s income. For instance, you
could structure a FLP to pay you $50,000 per year for 10 years, for a total of $500,000. Just like the
management fee, preferred payments are subject to income tax. Preferred payments reduce the value of
the FLP, allowing you to possibly utilize other wealth transfer strategies.
Contact us at Team Oliver for a complimentary consultation if your situation might benefit from a Family
Limited Partnership.
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Financial Life Advisors (FLA), a Registered Investment Adviser, and Jim Oliver & Associates, P.C. (JOA) are under common ownership and control. Team Oliver is used to describe collaborative services of both firms. Professional tax services are provided by JOA and investment advisory services are provided by FLA, each under separate agreements.
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Sign up here to schedule a
COMPLIMENTARY
consultation with a member
of Team Oliver.
Please bring a copy of last
year's income tax return.
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