PROS AND CONS OF A FAMILY LIMITED PARTNERSHIP
May 23, 2023
Owning your own business or investment portfolio can be incredibly rewarding. But if you don't protect it, all your hard work could be for nothing. Some of our clients choose to create a family limited partnership (FLP) to protect their assets, themselves, and their families from taxes, creditors, and probate.
What is a family limited partnership?
An FLP is a legal entity owned by two or more family members. It can hold the accounts, properties, or businesses that are owned by said family members.
An FLP has at least one general partner who handles the management of the partnership. They have unlimited liability and are compensated by the partnership for their work. Often, one or both parents fill the role of general partner(s). They contribute accounts, property, or a business to the FLP and retain control of their assets until transferred to the next generation. To facilitate this transition, the children are given limited partnership interests.
Limited partners 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.
Benefits of Using an FLP for Estate Planning
An FLP is useful as an estate planning strategy for several reasons:
An FLP can help protect accounts, properties, and businesses in the entity from your and your family’s creditors. This is because those assets aren't owned by you and your family anymore, but instead by the FLP. If a creditor obtains a judgment against you or your family for a claim not related to the FLP, it will be difficult for them to access anything in the FLP to satisfy that claim.
Because of its lack of control and restrictions on selling a partnership interest, the value of the limited partnership interest that you give to a family member can be discounted, allowing you to maximize your annual gift tax exclusion and lifetime estate and gift tax exemptions.
Transfer of partnership control can occur slowly, minimizing transfer taxes, allowing you to maintain control, and giving your family a share of the income and profits. Your family can take time to become more familiar with the business. Meanwhile, they will not be exposed to the partnership’s liabilities.
If you own real property in a different state, transferring ownership of the property to the FLP allows your loved ones to avoid an ancillary probate proceeding at your death. This is because the entity will own the property, not you.
Disadvantages of an FLP
While there are several benefits to using an FLP, there are a few disadvantages:
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. This includes holding regular meetings, keeping track of 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. You'll want to make sure that their interest is held either in a trust or a Uniform Transfer to Minors Act account.
The creation and management of an FLP is a sophisticated planning strategy that requires experienced estate attorneys and continued management by involved parties.
Is an FLP Right for You?
If you have a business or investment portfolio that you want to plan for, we would love to discuss it. Our experienced estate planning attorneys in Dublin, Ohio can help you find to pass your wealth on to the next generation while protecting your life savings, minimizing assets, and maintaining control for as long as you want. To discuss this strategy in detail, give us a call at 614-389-9711.