When it comes to wealth protection for families, there are many different options available. Estate planning strategies have long emphasized asset protection, tax minimization, and other wealth safeguards for clients with extensive asset holdings. As society has changed over many decades, however, many of those protections are now of tremendous value to families of more moderate means as well. Before you settle for inadequate wealth protection, find out how a family limited partnership (FLP) can benefit your family.
What is an FLP?
A family limited partnership, or FLP, is a special type of partnership for families. It’s like other limited partnerships in that it’s made up of general and limited partners, each with their own level of liability and responsibility. The general partners have all the responsibility for making management decisions, handling investments, and other important duties. Along with that responsibility, they also have one hundred percent of the liability attached to the partnership.
The limited partners, on the other hand, are not allowed to participate in any of that decision-making, have no role in managing the partnership, and have more limited liability. That makes this type of partnership a great option for families, where the older family members – usually the grandparents or parents – place their own assets into the partnership. In return, those senior members of the family typically take on a small portion of interest as general partners. They also generally accept a more sizeable limited partnership interests, which they then transfer to the younger members of the family – either as a direct transfer or by placing the interests in a trust.
What Benefits Can an FLP Provide?
There are many benefits provided by an FLP, with most related to things like tax advantages and asset protection. The limited partnership can also be used to take advantage of gift tax exclusions, and can enable the entire family to enjoy reduced investment fees. Let’s examine those benefits separately, to get a better idea of how they all work to your advantage.
Reducing Size of Taxable Estate
One of the most important benefits for the senior members of the partnership is their ability to use the entity to reduce the size of their estate – and thus reduce their estate tax liability. By transferring assets to the partnership, they remove them from their estate, which helps to minimize the tax liability that the estate would be exposed to when they die. At the same time, they get to maintain control over the assets through their general partner interests – enabling them to continue to make distributions of assets and make important investment decisions.
Transfer of Interest Qualifies for Gift Tax Exclusion
Another key feature that these partnerships can provide is in the area of asset transfers and the applicability of the gift tax exclusion. When these assets are transferred, those transfers can make use of the annual exclusion – enabling older family members to make substantial reductions in not only the estate tax liability, but income and gift taxes as well. The law permits transfers of those limited shares to be discounted, just as long as the transfer is made between members of the same family. Since the FLP is designed for use by families, the partnership is an ideal vehicle for making use of these legal opportunities.
Asset Protection from Creditors, Divorce, etc.
Asset protection is one of the main features that families should always be seeking, and the FLP provides that as well. Families generally want to keep wealth to pass down to their children and grandchildren, but that can be difficult to do without the right protection. With this limited partnership, you can secure protection against everything from future creditors or litigants to divorce. Since litigants and creditors cannot legally gain access to cash distributions from the partnership without getting the consent of general partners, this can be a great way to protect assets against creditors seeking your children’s wealth.
Reduced Investment Fees
Of course, there’s another advantage to combining the family’s assets and investments in this way: it helps to reduce the fees paid for investment activities. Some families go to all the trouble of managing separate investment accounts for every member of the family, and end up paying higher investment fees for the trouble. With this partnership, there is only one brokerage account to worry about, so the fees for investments are centralized as well. If you plan on making investments to help your family wealth grow, this can be a great way to do it.
Potential Risks
Despite all those benefits, there are still risks to using these partnerships for your family needs. Like any legal entity, the partnership needs to be created the right way to ensure that it complies with all relevant state laws. The last thing any family needs is for the validity of the partnership to be questioned due to some minor and easily-avoidable mistake made during the partnership-creation process.
In addition, it’s important to understand that there are certain formalities that must be followed when you’re operating this type of entity. There are certain ways to transfer property, and rules that must be followed when you’re distributing assets or making investments. In some ways, it is helpful to think of the partnership as a business venture, so that you don’t allow yourself to become so casual about its operations that you fail to properly follow these rules and processes.
Get Professional Assistance
As with any legal concern, it’s critical to know your limitations when dealing with a family limited partnership. As advantageous as they can be for your family’s estate planning needs, FLPs can also be problematic when they’re mismanaged or taken for granted. That’s why experts recommend seeking the advice of competent counsel before you set up your own partnership. At the Fouts Law Group, LLC, our estate planning experts can help you to establish the perfect FLP for your family’s needs, and will provide the guidance and assistance you need to ensure that you operate it properly. To learn more about how we can help you to take advantage of this powerful tool, contact us online or give us a call at (404) 596-7520.
