Family Limited Partnerships: A Strategic Estate Planning Too

Jenny Handwerk |

Family Limited Partnerships: A Strategic Estate Planning Too

Family Limited Partnerships (FLPs) is an advanced estate planning technique that helps families transfer wealth to the following generation in an orderly manner while preserving family control over their assets. High-net-worth individuals and business owners who want to avoid estate taxes and safeguard family assets may find FLPs particularly helpful. 

The wealth creator would generally own the shares in the General Partner, ensuring that they retain total control over the devolution of their assets. A General Partner is typically a corporate entity, and a third-party service provider is often appointed to administer it daily. Children and other family members are usually the Limited Partners, while the wealth creator typically has a minority interest as a Limited Partner.

This partnership combines assets, investments, and other family companies into a cohesive entity. The general and limited partners are the main players in an FLP. General partners are normally in charge of managing the company's assets and making decisions. In contrast, limited partners are frequently family members who provide funds and play little to no part in day-to-day operations. 

The separation of economic ownership and control in FLPs makes them a popular structure for family wealth planning since it improves asset protection against creditors and reduces the risk of dispersal by "beneficiaries" (Limited Partners). A Limited Partner's involvement in the capital or revenue of the FLP is restricted to what is stipulated in the Partnership Agreement, which can be tailored to each family's specific requirements and succession plans. 

Benefits of a Family Limited Partnership

Increased Control Over Assets

The increased control it offers over family assets is one of the main benefits of creating an FLP. The family can continue to have centralized management thanks to the partnership structure, usually with one or more general partners in charge of making decisions. Limited partners, frequently family members, take part in the partnership but have little power. This arrangement can be a valuable strategy for reducing conflict and protecting family wealth.

Estate Tax Reduction

The potential of an FLP to lower the estate's taxable value is one of its main advantages. There may be estate tax savings when assets are moved to the FLP since their value is sometimes lowered for estate tax purposes.

Asset Protection

FLPs also work well for protecting family property. Placing assets into a partnership might provide protection against creditors and prospective legal actions. 

The limited liability of limited partners, who are often immune from being held personally liable for the debts or legal responsibilities of the partnership, provides this protection. This feature can be extremely helpful for high-net-worth individuals who want to protect their wealth against unforeseen financial difficulties.

Control Retention

An FLP's general partners, frequently parents or senior family members, maintain authority over the partnership's assets. They can decide how to manage operations, allocate revenue, and make investments.

Tax Benefits

FLPs provide several tax benefits. They can lower or even completely eliminate gift and estate taxes, making it easier to transfer assets across generations. Furthermore, family members in lower tax categories might split the partnership's revenue, which could lessen their total tax burden. 

Disadvantages of Family Limited Partnerships

Writing an FLP has drawbacks. First, due to its complexity, it can be costly to set up and maintain. A tax specialist and an estate planning attorney are typically needed to set up an FLP; you might also need to contact other experts who support FLPs. Furthermore, since an FLP must operate as a business for tax purposes, it may subject you and other family members to obligations and debts.

Final Notes

Family limited partnerships are a helpful estate planning strategy that helps ensure the efficient transfer of wealth to future generations while offering control, tax advantages, and asset protection. However, FLPs are not a one-size-fits-all solution, and their effective implementation necessitates carefully evaluating the family's objectives, resources, and legal and financial counsel. Effectively designed and managed FLPs can be a potent tool for protecting family wealth and accomplishing long-term financial goals.