Do you own a family run business? Do you own and manage rental properties? Do you receive income from sources that require active management such as income from royalties, patents or copyrights? If so, a family limited partnership may be an entity that can provide significant benefits to you and your family. This will be particularly true if Congress is unable to agree upon a tax package as we approach the so-called "fiscal cliff." If the federal estate tax exemption is lowered, and/or tax rates jump for estate and gift taxes, an FLP may provide additional benefits by way of tax savings.
What is a family limited partnership (FLP)? A family limited partnership is an entity that may serve to provide its owners with the substantial benefits regarding the management, conservation, and protection of FLP assets. The FLP basically establishes two different ownership interests for its partners, a general partnership interest and a limited partnership interest. The partnership itself is initially funded with assets contributed by the partners in proportion to their respective interests in the partnership. The contributions are then maintained in separate accounts of each partner.
Transitioning Ownership to Family Members.
The partners may transition ownership of the FLP, either by a gift (during life) or bequest after death, by transferring limited partnership interests to other family members. The value of these interests is entitled to a discount based on the lack of control and limited marketability of limited partnership interest.
For example, an FLP could be established as follows. The Parent contributes 99% of the assets to the partnership. In return, the Parent receives a 99% limited partnership interest, and the Parent's child contributes the other 1% of the assets in return for a 1% general partnership interest. The Parent may later decide to then transfer some or all of their limited partnership interest to their child during life or at death. Again, the transfer of the limited partnership interest is entitled to a substantial valuation discount on the gift or estate tax return due to lack of marketability and lack of control.
The formation of the partnership does not give rise to a taxable gift as long as each partner’s contribution is properly reflected in his or her capital account and does not increase the value of any other partner’s interest in the partnership. While the FLP is designed to primarily provide non-tax benefits relative to the management, conservation, and protection of its assets, the FLP may also result in substantial gift and estate tax savings.