Part One

How is an FLP established?

In order to establish a Family Limited Partnership, the senior family members (i.e., the parents) transfer property to the partnership in exchange for a small general partnership interest (such as 1%) and a very large limited partnership interest (about 97%). The children make a contribution in exchange for a 1% general partnership interest.

Typically, the parents would hold both the general and the limited partnership interests as Trustee of their Revocable Trust, although that isn’t always the case. The parents would be the managing general partners having sole management control over the partnership. Their retained general partnership interest allows them to have complete control over day-to-day investment and management decisions which relate to the partnership property. The limited partners and other general partners haven’t any voice in the management of the partnership.

How does a Family Limited Partnership reduce the value on my estate?

The Family Limited Partnership can be drafted to provide that the limited partners will not be allowed to transfer their partnership interests during their lifetime without the other partner’s consent. Restriction of transferring the partnership interests will reduce the value of the gifted partnership interest for gift tax purposes by reducing its marketability (“marketability discount”). Because the limited partners have no voice in the partnership’s management, the value of the gifted limited partnership interest will be discounted to reflect this lack of control (“control discount”). Collectively, these two discounts usually reduce the value of the transferred interest for gift tax purposes by 20%-60% (and the taxes by 10-25%), depending on what kind of assets are being held by the partnership.

Can I retain control over partnership property?

Yes. Control over partnership property can be maintained for as long as you want it to. A plan can be prepared making you the managing general partner with sole management control over the partnership. Your children can have as much or as little control as you require them to. You could even go so far as to allow them only the right to stop you from independently dissolving the partnership. You could retain all other powers.

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.