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Home > Services > Domestic Wealth Planning > Family Limited Partnerships (FLP)
An FLP is a business entity holding assets for its contributing members. A Family Limited Partnership can also be described as a Limited Partnership with special features designed to create tax savings and accomplish other asset protection goals. Family Limited Partnerships are widely used to reduce estate taxes and protect accumulated wealth from potentially hostile claims.
In an FLP, family members are set up as General Partners. For example, a husband and a wife would each own a small, 1% or 2% interest. "Safe assets" - those that are not likely to produce liability - such as bank and brokerage accounts, are generally transferred into the Family Limited Partnership. General Partners can then add limited partners, such as a son or daughter, who will be able to receive distributions from the FLP.
An FLP works well for asset protection because no state law allows a creditor to seize or collect against property held by the partnership. The property transferred to the Family Limited Partnership is generally safe from attack, but the creditor may not stop at trying to seize property. Creditors may attempt to reach ownership interests in the partnership. Although a Family Limited Partnership on its own does offer substantial added protection against collection activities, the best protection in the Family Limited Partnership is in conjunction with a Kinetic Asset Protection Trust.
There are two basic reasons for this widespread use.
1) The FLP's popularity is a result of the originator or donor’s ability to transfer assets down to his descendents at a lower transfer tax cost than would be otherwise incurred with a direct transfer of the assets to descendants.
2) The donor retains control of the assets by retaining control of the general partner.
Additionally, the FLP is a very attractive estate-planning tool. There are ways to eliminate probate courts and gift taxes and the FLP is normally a good answer for passing down assets. One thing that should be noted is that the FLP should not contain all of the estate assets, but instead, only ten to forty percent of the estate assets.
Future generations can gain access to the passed on assets by reducing their inheritance taxes and liability by being responsible only for the limited capacity of their interest.
A) The parents own the various assets. Although the parents can serve as General Partners in their individual capacities for creditor protection purposes, they establish and capitalize an entity to act as general partner of the FLP.
General Partners retain all management rights with respect to Limited Partners
Ø The Partnership Agreement limits transferability of limited partnership units and the owners of these units do not exercise management control over the Partnership. As a result, the value of each unit is reduced or "discounted" to a value less than the actual share value of the Partnership assets.
B) This entity is usually an S Corporation or an LLC because these entities are taxed as "pass through" entities. The entity and the parents (and the children too, if they desire) in the beginning form the limited partnership with the general partner holding a 1% interest and the parents owning the remaining 99% interest in the partnership. In exchange for its interest in the partnership, the general partner contributes 1% of the capital and the parents then contribute the remaining assets to the partnership. The parents then assign their limited partnership interests to their children either immediately or over time, depending upon which would produce the lowest overall transfer tax cost.
Typically, the parents make a nontaxable transfer of assets to the partnership in exchange for partnership units. The partners then begin the systematic gifting of limited partnership units to junior generation members, bringing the junior generation into the partnership.
If any of the donees are minors or are in need of Spendthrift protection from creditors, trusts may be used to hold their interests in the partnership. This structure allows the parents, as general partners, to transfer interests in the Limited Partnership to the children as well as control the management and investment decisions of the partnership.
The FLP is normally structured as a fixed term partnership. A Limited Partner generally has a right to withdraw from the partnership, and to receive the fair value of the Limited Partner's interest, by giving six months notice. However, that provision does not apply if the agreement specifies "the time or the events upon the happening of which a Limited Partner may withdraw or a definite time for the dissolution and winding up of the Limited Partnership." For instance, the Limited Partnership may provide that it is to last for thirty years. In that case, under appropriate state law principles, limited partners would not have the right to withdraw prior to the end of the thirty year fixed term.
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