Family Limited Partnerships For A Family Business
A Family Limited Partnership (FLP) is designed to centralize a family business or family investments and assets. Basically, the FLP can combine a family’s assets into a single family-owned business partnership wherein family members can own shares.
With estate and succession planning, our qualified and experienced business attorneys can help allocate control to avoid family disputes and let you know the best way to set up a legal entity to minimize state and federal taxes. A family business can transfer assets into an FLP, also taking advantage of minimizing taxes, avoiding probate and creditors. Perhaps your grandparents have a summer vacation home. Assets such as property can also be included in an FLP.
FLP’s are often set up to minimize estate taxes as the shares can be transferred to each generation, at lower tax rates than a partnership holding. This partnership itself is not taxable. The partnership owners report the partnership’s income and deductions on their personal tax return in proportion to their interests.
An FLP is not a conventional trust since family members actually own a share in the ‘business’. Further, the shares can be gifted to other family members, taking advantage of gift tax exemptions. Having an FLP can save families thousands of dollars in gift and estate taxes. Combining trusts with a limited partnership can make a very powerful family asset protection tool.
Families may also save on investment fees. Instead of having separate brokerage accounts or trusts for each family member, the FLP can have one brokerage account. The children or grandchildren can each own, or have their trust own partnership interests.
There are two types of FLPs: limited and general. In a limited FLP, the partners do not manage the partnership - they have limited liability. General partners control the management and investment decisions and bear all the responsibility of liability.
The FLP and can also provide protection from creditors and spouses of any future failed marriages. Creditors cannot force any cash distribution or own any interest of a limited partner without the consent of the general partner. If a limited partner ceases to be a family member such as a divorce, the partnership can be set up requiring that person to transfer back their ‘share’. Unlike a trust, an FLP has flexibility since it can be amended and changed.
Typically, grandparents or parents will contribute assets to the partnership in exchange for a small general partner interest, or a large limited partner interest. These senior family members can then give all or part of the limited partner interest to their children or grandchildren. That interest can go directly to the heirs, or set aside, in a trust.
The FLP can consist of liquid, illiquid and a complexity of asset mixes. It’s interesting to note that investor Warren Buffett pooled money from 7 family members and close friends and started an FLP. Likewise, Sam Walton (Walmart) created a similar partnership. One doesn’t have to have millions to set up an FPL. Meeting with a qualified and experienced business lawyer can determine whether an FLP is something you should consider.
One way to protect your family business and reduce tax liability is with a family limited partnership, or FLP.
Call the family business lawyers at 303-618-2122 to schedule a consult.