A family limited partnership, or FLP, is a highly effective way to protect your assets. Not only will it do this during your own lifetime, but it can also protect it for generations to come by keeping assets within the family. In addition, federal laws favor limited partnerships, meaning there are some tax breaks and other benefits available.
An FLP will have two types of partners: general partners, and limited partners. The general partners, usually the senior family members, have complete control over how shares of the partnership are allocated. Limited partners, consisting of children and grandchildren, will gain benefits from the shares granted to them, but have no control over how partnership assets are to be used. This makes an FLP very secure against taxation and litigation, especially when it consists of a highly diverse mix of assets.
As part of our estate planning and asset protection services, Hart & David provides legal assistance with structuring your family limited partnership.
For Estate Planning
Normally when wealth is transferred from one generation to the next, heavy gift and estate taxes can drastically reduce the amount passed down. With a properly structured FLP, these taxes can be reduced or eliminated. It accomplishes this as assets are contributed to the partnership and interests are transferred to children and/or grandchildren, effectively reducing the taxable estate of the senior family members.
Since limited partners have no control over how interests are distributed, they qualify for certain discounts and tax breaks as well. Specifically, the transfer of a limited partnership’s interests qualifies for a gift tax exclusion, which can drastically reduce taxes on income, gifts, and the estate.
For Asset Protection
One primary purpose of an FLP is to keep assets within the family. Otherwise, in generations down the line, family assets could be put at risk in the event of litigation, death, or divorce. Since creditors have no power to force distribution or transfer of limited partner interests without the general partner’s consent, there is low risk that assets will be lost in the future.
In the case of a divorce, say among one of your children, as a limited partner he or she will likewise be protected from the ex-spouse’s attempts to seize partnership interests.
Structuring an FLP
In order to function the way necessary to protect family assets, the partnership must be correctly structured. Not only should it operate with both future and present generations in mind, it must also adhere to strict federal and state standards. Otherwise, it may call the attention of the very creditors and litigations it is designed to avoid.
Only certain assets should be transferred with an FLP. This type of partnership is designed for the transfer of stocks, cash, and real estate, but not for life insurance or your home. In order to work effectively as part of your overall estate plan, it must be very carefully put together.
Hart & David offers the legal experience necessary to assist with structuring a family limited partnership. Our knowledge of federal and state laws coupled with experience in estate planning and dispute resolution allows us to provide you with skilled advising, document drafting, and other related services.