Family Limited Partnerships are designed to reduce the value of an estate (for estate tax purposes) while allowing one to maintain full control of investments and assets inside the partnership.
Family Limited Partnerships are constructed much like traditional limited partnerships. There are two parties involved: "General Partners" which control the trust, and "Limited Partners" who have a share in the profits.
The General Partners (you and/or a spouse) design the partnership to gift Limited Partner shares to family members. General Partners control the operations of the Family Limited Partnership and make day-to-day investment decisions. They can also receive a percentage of the Family Limited Partnership’s income in the form of a management fee.
Limited Partners (the heirs) have an ownership interest in the Family Limited Partnership but they have limited control. They share in the income generated by the Family Limited Partnership depending on how many shares they own. When the Family Limited Partnership is dissolved, a proportionate amount of the property will pass to each Limited Partner.
With the assistance of an attorney, one can place assets within a Family Limited Partnership using the estate tax credit. For example, a husband and wife can each transfer up to $1,500,000 ($3 million total) into a Family Limited Partnership and allocate those assets to the Limited Partnership side. They can then place a smaller amount (e.g. $12,000) for the General Partnership side. There are usually no taxes incurred when funding a Family Limited Partnership with one’s assets.
In the beginning, you and your spouse own both General Partner and Limited Partner shares. Over time, you gift to your heirs Limited Partner shares using your annual $12,000 gift exclusion. Don't worry about giving away too much of the shares. Based on current tax law, the General Partners may own as little as 1% of the Family Limited Partnership's assets and still retain control. That means one can still buy and sell assets, dispose of property, and declare any distributions of shares.
Family Limited Partnerships allow one to pass on more than the maximum $2 million ($4 million per couple) Estate Tax Credit.
A major key to the success of an FLP is having a very good operating agreement that is custom-tailored to the family business.
When established correctly, Family Limited Partnerships can be very powerful estate planning and asset protection planning tools.
