The attraction of Family Limited Partnerships (FLPs)
A Family Limited Partnership attracts many because it is an effective estate and financial planning tool which accomplishes some or all of the following:

• Centralizes and streamlines management of assets;
• Protects assets from a limited partner's creditors;
• Preserves and passes family wealth over to members of younger generations;
• Minimizes gift and estate taxes as wealth shifts between generations;
• Provides for successor ownership of the family business;
• Save on income taxes by dividing the income from the business among family members in lower tax brackets
• Provides greater planning flexibility by allowing ample room for a change of heart or a change in circumstances.

Here is a more detailed review of some of these bullet points:

Protection of Assets

Like a trust, the Family Limited Partnership makes possible the transfer and control of family assets through a succession of generations. Family assets are protected against unnecessary estate taxes, personal creditors of family members who are limited partners, and judgment creditors that may arise from litigation, which is very important in high-risk businesses.
Preservation and passing on of family wealth
Family Limited Partnerships can be an effective vehicle for managing, accumulating, preserving and transferring family wealth. An interest in the Family Limited Partnership, whether as a general partner or as a limited partner, is a "property right" and has value as do other types of property.

Part of usefulness of the Family Limited Partnership is that it provides for the succession of family ownership and control between generations as it shelters assets from taxes and creditors.

Saving on both gift and estate taxes

The Family Limited Partnership can assists in the transfer of wealth by reducing gift and estate taxes. The tax-savings provisions of the federal transfer tax laws—the applicable exclusion amount and the gift tax annual exclusion, work well in the Family Limited Partnership planning environment.

If partnership interests are transferred to younger family members when the business itself is new, the interests transferred may not yet have risen to the high values they will later on for gift or estate tax purposes.
Additionally, there may be special valuation discounts recognized by the courts for transfers of Family Limited Partnership interests: the so-called "lack of marketability discount," and the "minority interest discount." Currently, it is satisfactory to observe that these discounts, when available, enable wealth to pass to younger generations through a Family Limited Partnership at a significantly lower tax cost than might otherwise be possible.

Successor ownership of the family business

The federal transfer taxes are only part of the problem. A family business can create discord within the family over its disposition. Family members active in the business expect to be rewarded as well as given the opportunity to participate in its ownership. Those not active in the business expect to be treated fairly when the estate is distributed, which may prove difficult should the bulk of the estate consist of the business.
Furthermore, non-family members sometimes play key roles in the business and also must be taken into account.

Many of these practical aspects of transferring a family business can be resolved by using the Family Limited Partnership.

Dividing family income

Family Limited Partnerships allow the net earnings of a family business to be divided among several members of the family, thereby reducing the annual income tax burden. Rather than all the net earnings being taxed at the top federal tax bracket of the highest-earning member of the family, some of the income may be taxed in the lower brackets of other family members.
The Family Limited Partnerships flexibility
Some financial and estate planning arrangements are irrevocable. In order to secure the benefits offered one has to commit to a rigid course of action. If circumstances change to render this course unfavorable, it may be difficult, if not impossible, to realign the planning arrangements with new family or financial realities.

The Family Limited Partnership is not an irrevocable arrangement, and allows plenty of room should changes become necessary. Undeniably, since the Family Limited Partnership allows for the steady relinquishment of an older family member's ownership of a business to members of younger generations, the partnership agreement provides for the partnership to be amended or to be terminated if change is necessary.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.