The Benefits of a Family Limited Partnership

A Family Limited Partnership (FLP) is a business entity that serves both business and estate planning purposes. However, FLPs are not for everyone. If you are considering creating a FLP, talk to a lawyer with experience in business formation and estate planning.

Business Continuity

While FLPs are often used for estate planning purposes, they are ultimately a business entity. As such, they offer numerous advantages over standard LLCs, LPs, and other corporate entities:

• Only family members can be members. One of the challenges of owning and operating a business is choosing the right business partners. Business owners can also find themselves partnering with outside investors or lenders who may not be as invested in the success of the business. The exclusivity of the FLP means that you always know who your partners are, and you never have to worry about outsiders taking control of your business. This can help avoid costly business disputes between the owners and an unplanned break-up of the entity.
• Ownership can be easily transferred to family members. While only family members can be owners, it is comparatively easy to transfer shares and other business assets to family members. You can gift shares over time and decide who should be the controlling owner. Ownership and control of the business can transition in a gradual and orderly manner.
• You can implement stipulations in the partnership agreement to encourage stability. Stipulations are just restrictions on how the business will function. For example, you could set a stipulation that states that the sale of certain assets requires unanimous approval in order to prevent the mismanagement of the business.

Asset Protection

Another benefit of FLPs is that they create separation between your business and personal assets. This means that your business assets are protected from claims arising from personal liabilities. For example:

• A limited partner in a FLP receives a civil judgment against the partner for a personal liability, such as a car wreck.  Most of the partner’s liquid assets were contributed to and became partnership property in the FLP before the car accident.  The judgment creditor cannot directly access the FLP assets to satisfy the judgment against the limited partner.  All the creditor can do is obtain a “charging order” against the partner’s interest.  A charging order only entitles the creditor to receive distributions that would have been made to the limited partner.  The general partner of the FLP can determine not to distribute income or assets to the limited partner so that the judgment creditor receives nothing.  This asset protection feature discourages potential creditors from filing suit because collection on a judgment will be difficult.

Estate and Gift Tax Reduction

A FLP can help reduce estate and gift tax liability.  Parents can take advantage of the annual gift tax exclusion by gifting FLP interests to their children each year.  Over time, the child’s limited partnership interest increases and the value of the gifted interests appreciates.  These appreciated gifted interests avoid gift taxation because they are limited to the annual gift tax exclusion and they avoid estate taxation by removing the value of the gifted interests from the parents’ taxable estate.  The parents can maintain control over the partnership assets as the general partners or owners of the general partner, while reducing the amount of their estate that will be subject to estate taxes.

In addition, FLPs can reduce estate and gift taxes through valuation discounts for minority interest and lack of marketability.  FLP interests are valued lower than interests in other business entities because of the restrictions on the control and sale of the business. The lower valuation of your interest in the FLP lessens your potential estate tax liability because there is less value in your estate that is subject to estate tax.  The lower value of the gift means you can give more without the gifted interest being applied against your lifetime exemption.

Contact J Nichols Law, PLLC to Discuss Whether a Family Limited Partnership Is Right for You

Creating a FLP requires careful planning and consideration in order to take full advantage of the benefits. Contact us online to discuss whether a FLP makes sense for your family.