General Structure of a Family Limited Partnership (FLP) It has become increasingly important for people with assets to understand what the FLP is and why the use of FLP's have become so widespread.
A Family Limited Partnership is a Limited Partnership who's Limited Partners are family members.
The term "Family Limited Partnership" has no technical reference or definition in the Internal Revenue Code.
There are two basic reasons for this widespread use.
1) The FLP's popularity is a result of the originator or donor's ability to transfer assets down to his descendents at a lower transfer tax cost than would be otherwise incurred with a direct transfer of the assets to descendants.
2) The donor retains control of the assets by retaining control of the general partner.
Additionally, the FLP is a very attractive estate-planning tool.
There are ways to eliminate probate courts and gift taxes and the FLP is normally a good answer for passing down assets.
One thing that should be noted is that the FLP should not contain all of the estate assets, but instead, only ten to forty percent of the estate assets.
Future generations can gain access to the passed on assets by reducing their inheritance taxes and liability by being responsible only for the limited capacity of their interest.
1) The parents own the various assets.
Although the parents can serve as general partners in their individual capacities for creditor protection purposes they establish and capitalize an entity to act as general partner of the FLP.
The Partnership Agreement limits transferability of limited partnership units and the owners of these units do not exercise management control over the Partnership.
As a result, the value of each unit is reduced or "discounted" to a value less than the actual share value of the Partnership assets.
2) This entity is usually an S Corporation or an LLC because these entities are taxed as "pass through" entities.
The entity and the parents (and the children too, if they desire) in the beginning form the limited partnership with the general partner holding a 1% interest and the parents owning the remaining 99% interest in the partnership.
In exchange for its interest in the partnership, the general partner contributes 1% of the capital and the parents then contribute the remaining assets to the partnership.
The parents then assign their limited partnership interests to their children either immediately or over time, depending upon which would produce the lowest overall transfer tax cost.
Typically, the parents make a nontaxable transfer of assets to the partnership in exchange for partnership units.
The partners then begin the systematic gifting of limited partnership units to junior generation members, bringing the junior generation into the partnership.
If any of the donees are minors or are in need of spendthrift protection from creditors, trusts may be used to hold their interests in the partnership.
This structure allows the parents, as general partners, to transfer interests in the limited partnership to the children as well as control the management and investment decisions of the partnership.
Term The FLP is normally structured as a fixed term partnership.
A limited partner generally has a right to withdraw from the partnership, and to receive the fair value of the limited partner's interest, by giving six months notice.
However, that provision does not apply if the agreement specifies "the time or the events upon the happening of which a limited partner may withdraw or a definite time for the dissolution and winding up of the limited partnership.
" For instance, the limited partnership may provide that it is to last for thirty years.
In that case, under appropriate state law principles, limited partners would not have the right to withdraw prior to the end of the thirty year fixed term.
Management General Partners have all management rights with respect to the limited partnership.
Limited partners are excluded from the management of the partnership except in respect to certain limited matters designated in the Revised Uniform Limited Partnership Act (RULPA).
If a limited partner takes part in the control of the partnership, he may lose his limited liability status with respect to a person who transacts business with the partnership reasonably believing that the limited partner was a general partner.
Allocation of Income and Gain Income and gain are allocated among the various partners in accordance with their percentage interests in the partnership.
The Internal Revenue Code contains detailed rules that must be satisfied in order for allocations of income and gain to be respected.
There are special rules under Section 704(e) of the Internal Revenue Code applying to family partnerships (although it is typically easy to structure the partnership in order to satisfy the special family partnership requirements).
Shifting and Gifting Simply put the objective is to shift rather than gift in order to take advantage of what is known as "valuation discounts.
"Valuation discounts allow the asset holder to leverage the annual gift tax exclusion and unified credit, allowing parents to transfer more assets to the junior generation with considerably reduced gift and estate tax liabilities.
Another benefit is that the Family Limited Partnership allows the parents to shift a portion of income earned by their closely held business to other family members, while at the same time retaining control over that business.
A Family Limited Partnership is a Limited Partnership who's Limited Partners are family members.
The term "Family Limited Partnership" has no technical reference or definition in the Internal Revenue Code.
There are two basic reasons for this widespread use.
1) The FLP's popularity is a result of the originator or donor's ability to transfer assets down to his descendents at a lower transfer tax cost than would be otherwise incurred with a direct transfer of the assets to descendants.
2) The donor retains control of the assets by retaining control of the general partner.
Additionally, the FLP is a very attractive estate-planning tool.
There are ways to eliminate probate courts and gift taxes and the FLP is normally a good answer for passing down assets.
One thing that should be noted is that the FLP should not contain all of the estate assets, but instead, only ten to forty percent of the estate assets.
Future generations can gain access to the passed on assets by reducing their inheritance taxes and liability by being responsible only for the limited capacity of their interest.
1) The parents own the various assets.
Although the parents can serve as general partners in their individual capacities for creditor protection purposes they establish and capitalize an entity to act as general partner of the FLP.
The Partnership Agreement limits transferability of limited partnership units and the owners of these units do not exercise management control over the Partnership.
As a result, the value of each unit is reduced or "discounted" to a value less than the actual share value of the Partnership assets.
2) This entity is usually an S Corporation or an LLC because these entities are taxed as "pass through" entities.
The entity and the parents (and the children too, if they desire) in the beginning form the limited partnership with the general partner holding a 1% interest and the parents owning the remaining 99% interest in the partnership.
In exchange for its interest in the partnership, the general partner contributes 1% of the capital and the parents then contribute the remaining assets to the partnership.
The parents then assign their limited partnership interests to their children either immediately or over time, depending upon which would produce the lowest overall transfer tax cost.
Typically, the parents make a nontaxable transfer of assets to the partnership in exchange for partnership units.
The partners then begin the systematic gifting of limited partnership units to junior generation members, bringing the junior generation into the partnership.
If any of the donees are minors or are in need of spendthrift protection from creditors, trusts may be used to hold their interests in the partnership.
This structure allows the parents, as general partners, to transfer interests in the limited partnership to the children as well as control the management and investment decisions of the partnership.
Term The FLP is normally structured as a fixed term partnership.
A limited partner generally has a right to withdraw from the partnership, and to receive the fair value of the limited partner's interest, by giving six months notice.
However, that provision does not apply if the agreement specifies "the time or the events upon the happening of which a limited partner may withdraw or a definite time for the dissolution and winding up of the limited partnership.
" For instance, the limited partnership may provide that it is to last for thirty years.
In that case, under appropriate state law principles, limited partners would not have the right to withdraw prior to the end of the thirty year fixed term.
Management General Partners have all management rights with respect to the limited partnership.
Limited partners are excluded from the management of the partnership except in respect to certain limited matters designated in the Revised Uniform Limited Partnership Act (RULPA).
If a limited partner takes part in the control of the partnership, he may lose his limited liability status with respect to a person who transacts business with the partnership reasonably believing that the limited partner was a general partner.
Allocation of Income and Gain Income and gain are allocated among the various partners in accordance with their percentage interests in the partnership.
The Internal Revenue Code contains detailed rules that must be satisfied in order for allocations of income and gain to be respected.
There are special rules under Section 704(e) of the Internal Revenue Code applying to family partnerships (although it is typically easy to structure the partnership in order to satisfy the special family partnership requirements).
Shifting and Gifting Simply put the objective is to shift rather than gift in order to take advantage of what is known as "valuation discounts.
"Valuation discounts allow the asset holder to leverage the annual gift tax exclusion and unified credit, allowing parents to transfer more assets to the junior generation with considerably reduced gift and estate tax liabilities.
Another benefit is that the Family Limited Partnership allows the parents to shift a portion of income earned by their closely held business to other family members, while at the same time retaining control over that business.