FF—Family Limited Partnership

The family limited partnership (FLP) is a valuable planning technique offering numerous advantages to the owners of a closely held business. With this technique, business interests and other assets can be transferred to family members at reduced values while maintaining indirect yet effective control.

ESTABLISHING PARTNERSHIP.The FLP is established by an agreement setting forth the partnership’s operating rules and the filing of a certificate of limited partnership with state authorities. The typical FLP agreement places restrictions and limitations on ownership of partnership interests, and cannot be changed or terminated for a specified number of years without the concurrence of all partners.

Once the agreement is drawn, the parents then contribute assets to the FLP, which in turn issues bothgeneralandlimitedpartnership interests. Thereafter, the parents make gifts of the limited partnership interests to their children. These gifts can be structured to fall within the gift tax annual exclusion, or the $12,920,000 (per the 2017 Tax Act) estate tax exclusion amount and used to immediately transfer large amounts of limited partnership interests.

ADVANTAGES OF PARTNERSHIP.The principal advantages of the FLP are bothcontrolandflexibility. As general partners, the parents have complete power and authority to manage the partnership. As limited partners, the children have no say in the management of the partnership, no liability for partnership debts, and a priority over the general partners in the event of a liquidation.

Income can be shifted to children in lower income tax brackets.9 Periodic gifts of limited partnership interests can reduce the parent’s taxable estate. Gifts of limited partnership interests are subject to valuation discounts for both minority interests and lack of marketability. Such valuation discounts, which can often range up to 30 percent and more, offer the opportunity to “leverage” these tax-free gifts. Even for those families without federal or state transfer tax concerns, an FLP allows gifts to be made of assets that are otherwise not easily divisible (e.g., the family farm). Transferring real estate located in another state to the partnership can avoid ancillary probate.

Because the children cannot transfer their limited partnership interests without the consent of all other partners, partnership assets are protected from claims against the individual partners (including those arising out of a divorce). Although creditors might succeed in obtaining a right to partnership distributions, the general partners have the power to withhold distributions by retaining income within the partnership.