A family limited partnership, commonly referred to as a FLP, comes with advantages and disadvantages. The following will examine what exactly is an FLP and what the advantages and disadvantages are as it pertains to estate planning.
What Exactly is a Family Limited Partnership?
A family limited partnership, or FLP, is an arrangement often used to transfer wealth from one generation to another. In essence, an FLP is when family members pool their finances to form a business of some sort. Each of the family members can buy shares in the business.
How is a Family Limited Partnership Structured?
There are two types of partners in an FLP: general partners and limited partners. General partners are responsible for the management of the FLP, and often own the largest share of the business. In contrast, limited partners do not have any management responsibilities, but rather buy shares of the business.
How Does a Family Limited Partnership Impact Your Estate Plan?
As mentioned above, families will often create an FLP as a means of transferring wealth from one generation to another. In addition, there are estate and gift tax benefits that come along with an FLP.
What Are the Advantages to a Family Limited Partnership?
Some of the advantages to an FLP include the following:
- Estate tax reduction
- Gift tax reduction
- Protecting your assets
- Distribution of wealth
- Flexibility for partners
Estate tax reduction
If a general partner transfers assets to an FLP, it removes those assets from their estate, which can reduce the size of their estate and the subsequent tax on the estate.
Gift tax reduction
As long as the value of the shares falls below the gift tax exclusion, any distributions will not be subject to gift taxes.
Protecting your assets
Once assets are transferred into the FLP, those assets become property of the FLP and are protected from potential creditors who owned the assets before they were transferred into the FLP.
Distribution of wealth
An FLP allows for wealth to be distributed to heirs via limited partnership shares.
Flexibility for partners
The specifics of any FLP will depend on the partnership agreement. In addition, the partnership agreement can be modified at a later date. This all allows for flexibility in the structure of the FLP.
What Are the Disadvantages to a Family Limited Partnership?
There are also some disadvantages to family limited partnerships. Some of the disadvantages include the following:
- Cost
- Business implications
- Complex structure
Cost
The cost of establishing and maintaining the FLP can be a downfall. While there are many advantages, you will ultimately need to weigh these against the cost of establishing and maintaining an FLP.
Business implications
Since an FLP is a business, you may not find it suitable to transfer personal assets into it.
Complex structure
Depending on your specific circumstances, the structure of your FLP can be somewhat complicated.
As outlined above, there are many factors to consider if you are thinking about establishing a family limited partnership. For any questions regarding family limited partnerships or your other estate planning needs, we are here to help. Contact us today to learn more about how we can work with you.
For more information regarding various estate planning and elder law topics, view our resources page, where you will be able to find previous blog articles, newsletters and our informative webinar series.
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