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Those are the promised benefits of a "family limited partnership" or FLP.
The use of the Family Limited Partnership (FLP) as a tool to transfer wealth to family members is becoming increasingly popular due to the significant benefits families can obtain by including partnerships in their estate plans.
An FLP is created when you transfer assets such as securities and rental real estate to a partnership. Initially, you will hold both General Partner interests and Limited Partner interests in the partnership. Over time, you will gift limited partnership units to other family members such as your children.
WHAT PROTECTION IS AVAILABLE THROUGH A FAMILY LIMITED PARTNERSHIP?
All the requisites of a limited partnership must be followed in order to have a valid FLP. Upon formation, the assets of the family are assigned or transferred into the FLP for ownership, management and control. In most FLP's, the parents are the general partners with a 1% interest, while the children and siblings share the remainder as limited partners. Thus the parents' exposure to risk of loss of property held by the FLP is greatly reduced. Even if a creditor obtains a charging order, the partnership can limit distributions (for legitimate purposes) to reduce exposure. THIS IS NOT A FOOL PROOF PLAN FOR ASSET PROTECTION. WE BELIEVE AN ASSET PROTECTION TRUST PROVIDES MORE PROTECTION.
TAX ADVANTAGES
- For gift tax purposes, the value of the transfer of Limited Partner interests in an FLP can be significantly reduced through the use of minority and marketability discounts.
- For gift tax purposes, the gifts of Limited Partner interests can be planned so the discounted value of the gift falls within the $11,000 annual gift tax exclusion. Therefore, the gifts will be tax free.
- For estate tax purposes, gifts of Limited Partnership interests remove value from the client's taxable estate, thereby reducing the amount of estate tax due upon death.
A good example of how to employ the family limited partnership is where you have a senior family member who is elderly and wishes to transfer his or her assets to a family enterprise where the children, as general partners, would take over the management of the assets, contribute some of their assets, and, on the death of the senior member, his or her share of the limited partnership would pass to the children or grandchildren.
The senior family member would receive the limited partnership interest and the children would receive a 1% general partnership interest in exchange for a transfer of assets to the partnership. If the senior family member's assets were worth $1.5 million dollars before the transfer, after the transfer to the family limited partnership in exchange for a limited partnership interest, the value of the limited partnership for estate purposes, using the 30% discount, would be approximately $1 million dollars. This reduction in value translates into an estate tax savings to the family, on the death of the senior family member, of approximately $200,000!
Note: The IRS has announced that they dislike the use of discounts in valuing gifts connected with family limited partnership interests and are looking at changing the law. When they will change the law, and what exact changes they will make are unspecified.
WE COULD GO ON FOR SEVERAL PAGES WITH THE BENEFITS OF A FAMILY LIMITED PARTNERHSHIP. WE ASK THAT YOU CONTACT US IF YOU HAVE QUESTIONS OR WANT TO PURCHASE YOUR OWN FAMILY LIMITED PARTNERSHIP.
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