Family Limited Partnership Lawyers Providing Knowledgeable Advice in Cape Cod and Throughout Southeastern Massachusetts
A Family Limited Partnership (or FLP), as the name says, is a partnership among family members that allows joint ownership of family-owned assets. It is a more sophisticated real estate planning tool often used in conjunction with an Irrevocable Life Insurance Trust. This tool is often used by families with significant assets, as it may prove to be useful for wealth preservation by allowing the family to protect assets, minimize taxation, and plan their estate. An FLP can have a combination of General Partners and Limited Partners.
A properly executed FLP may protect families from creditors and reduce or eliminate gift and estate taxes while still remaining flexible, giving the family the ability to make changes or updates to it anytime. Family Limited Partnerships typically require more administrative compliance than other alternatives, but also offer a number of benefits that often outweigh the work associated with it.
What are The Benefits Of Starting an FLP?
An FLP allows individuals to consolidate family assets and may lead to significant operational cost advantages. It can also reduce the taxable estate of older family members by enabling them to transfer property to their children, thus removing it from their estates and shielding it from federal estate taxes without giving up control or the ability to make decisions related to their property.
Another noteworthy benefit is the ability to simplify annual giving by the patriarch or matriarch and avoid gift taxes, due to the fact that FLPs qualify for the gift tax exclusion. This can result in tax savings for the family. Additionally, a properly-drafted FLP can help protect assets from creditors. Creditors cannot force distributions, vote, or own a limited partner’s interest without an approval from the general partners.
Another benefit of having an FLP is that it protects and preserves the family estate by keeping assets and properties in the family in the case of a divorce. If a limited partner gets a divorce, he or she is no longer part of the family unit, and the partnership can mandate that any property be transferred back to the FLP at a fair market value.
Who Should Consider Forming an FLP?
Individuals in their fifties, sixties, or seventies with many assets and/or a net worth of $2 million or more may want to consider the option of forming an FLP. This is also a useful option for families with significant real estate assets, because it allows the donor to avoid subsidiary probates by making gifts of real estate destined to a state where the donor does not live.
Due to the complexities of forming a Family Limited Partnership, it is recommended that those who are interested in this option begin planning for it early in life. It is worth mentioning that an FLP works best as an estate planning tool for those who have a sufficient amount of non-personal assets (such as investment properties and securities) to be transferred into the partnership. Because the FLP is technically a business, you cannot transfer personal assets into it without jeopardizing the ability to use the annual gift tax exclusion for property transfers to your heirs.
How Does an FLP Differ From an LLC or a Trust?
Both an FLP and an LLC are considered businesses, but an FLP is structured to take advantage of the IRS gift tax exemption on annual gifts to members of the family in the partnership. The IRS considers FLPs a pass-through entity when it comes to income taxes; in other words, it does not recognize an FLP as a taxpayer, and income from the FLP passes through to the partners.
A Trust is a completely different type of legal arrangement. It is not considered a business, but simply a vehicle set up to hold property for the benefit of the trustmaker’s beneficiaries. Individuals may place assets in a trust and pre-determine when and how they will be distributed, usually after the trustmaker’s death.
How Do I Know If an FLP is Right For Me?
Family Limited Partnerships can be quite complex to set up and manage, and they require extensive planning and research to ensure it will serve the purpose you envisioned for it. Seeking advice from an experienced professional is fundamental to make sure the FLP is the right choice for you and to become fully informed about what it takes to set up and run this type of legal entity. At Boyd & Boyd, our legal team of knowledgeable attorneys is ready to serve you and your family with all your estate planning needs.
Call us at (508) 775-7800 and request a free initial estate planning consultation to learn more.