Pros and Cons of a Family Limited Partnership

If you own your own business or have accumulated some investment portfolio, it is important that you do as much as you can to protect the efforts of your hard work and dedication. A family limited partnership (FLP) is a strategy worth considering — whether you seek to protect yourself, your investments, or your family from taxes, creditors, or probate.

What is a family limited partnership?
An FLP is an entity owned by two or more family members, created to hold the accounts, properties, or businesses that are owned by one or more of the family members. An FLP has at least one general partner who is responsible for the management of the partnership, has unlimited liability, and is compensated by the partnership for their work according to the partnership agreement. An FLP also has one or more limited partners who are permitted to vote on the partnership agreement but are not authorized to manage the partnership. The limited partners receive the income and profits of the partnership and have no liability. Often, one or both parents are general partners, as they have contributed accounts, properties, or a business they own to the FLP and want to retain control of them, even as they transfer them to the next generation. As part of the transfer, the children are given limited partnership interests while the parents retain general partnership interests.

What are the benefits of using an FLP?
This estate planning strategy is useful for the following reasons:

  • An FLP can help protect accounts, properties, and businesses in the entity from your and your family’s creditors, because those items are owned by the entity, not by you and your family as individuals. If a creditor obtains a judgment against you or your family for a claim not related to the FLP, it can be difficult for the creditor to access anything that the FLP owns to satisfy that claim.
  • The value of the limited partnership interest that you give to a family member can often be discounted, because of factors such as lack of control and restrictions placed on selling a partnership interest. As a result, you can maximize your annual gift tax exclusion and lifetime estate and gift tax exemptions.
  • Transfer of partnership control can occur over time, minimizing transfer taxes, allowing you to maintain control, all while giving your family a share of the income and profits. Over time, your family can become more familiar with the business, while minimizing their exposure to any liabilities of the partnership.
  • If you own real property in a different state, transfer of ownership in the property to the FLP allows your loved ones to avoid ancillary probate proceedings at your death because the entity will own the property, not you.

What are the downsides of using an FLP?
While there are many benefits to an FLP, there are a few disadvantages that must be considered:

  • An FLP must have at least one general partner that will have unlimited liability for the partnership’s debts and obligations.
  • An FLP is a business entity, so the formalities of operating a business must be observed, such as holding regular meetings, keeping minutes, and paying the general partner appropriate compensation.
  • If you want to give a limited partnership interest to a minor, additional planning may be needed to make sure that the interest is held either by a trust for the minor’s benefit or in a Uniform Transfer to Minors Act account.
  • The creation and management of an FLP is a sophisticated planning strategy that requires experienced professionals and continued management by involved parties.

Could this be the best solution for you?
If you have a business or investment portfolio that you want to plan for, we would love to discuss ways you can pass it on to the next generation while protecting your life savings, minimizing taxes, and maintaining control for as long as you want. To discuss various strategies and create a unique plan to protect you and your family, please give me a call.