In our recent Legal Hour on Wills & Estates, one of our guests asked about Family Limited Partnerships (hereinafter referred to as “FLPs”).
In a FLP, an individual or a couple with wealth will contribute their assets to a limited partnership with a goal of preserving the assets and family wealth for future generations. A properly structured and administered FLP will allow an individual or couple to pass their wealth to their children and grandchildren with minimal inheritance or estate tax consequences. In return for the inheritance or estate tax savings, the contributing individual or couple sacrifices some control of their assets, incur soft costs for establishment of the partnership, and carry costs for the Limited Partnership, which is treated as a business entity.
In a FLP, the individual or couple looking to preserve their wealth for future generations contributes their assets they hold in their individual name to the FLP in return for general and limited partnership interests. Typically they would receive a 2% general partnership interest and a 98% limited partnership interest. As the general partner, the contributing individual or couple maintains control over the assets they contribute to the FLP. The assets may include real estate, investments, and business interests. Assets, such as 401k and IRA retirement accounts cannot be included. The individual or couple establishing the FLP then issue limited partnership interests to their children and grandchildren. To move the wealth out of their estate, the contributing individual or couple gifts their 98% limited partnership interest to their children and grandchildren. In this manner, the contributing individual or couple maintains control over the assets as the general partners, but no longer accounts for the assets in their estate because they have gifted the assets to their children and grandchildren in the form of limited partnership interest.
We must be clear that in a properly structured and administered FLP no actual funds transfer, the general partners are only gifting interest in the limited partnership. When the general partners (Mom & Dad) pass away, the limited partners can generally cash out their interest.
FLPs are not very common in our immediate area because they do not make sense for many people. In is recommended that you have significant assets to consider this planning method. It is also important that you understand what you are trying to accomplish with the partnership.
To better understand partnership interest, discounts, and gifting requirements of a FLP, and to discuss your individual needs, schedule an appointment with Attorney Jim Sher by calling 610-683-0771 or emailing firstname.lastname@example.org.
Please remember, there is no magic in estate planning. Every estate planning option has a pitfall; you must navigate through the statutes and codes to find the options that present the lesser of evils for you.
Disclaimer: This is a simple overview of the subject matter. Please consult an attorney for legal advice on your estate planning needs.