Under what circumstances will a family limited partnership reduce transfer taxes?

Family limited partnerships (FLPs) can be effective tools for asset management, facilitating pooling of investments and economies of scale. If properly structured and administered, they also allow you to remove a substantial percentage of the value of the partnership assets from your taxable estate.

Some of the more common assets that are transferred into FLPs include:

• Real estate;
• Closely held stock;
• Marketable securities; and
• Other limited partnership interests.

How an FLP works

After the FLP is properly funded, the donors will often gift part or all of their partnership interests to other family members. If the interest being gifted is a limited partnership interest or a non-controlling general partnership interest, minority discounts and discounts for lack of marketability typically reduce substantially the appraised value of each gift. Assuming the donors relinquish control of the partnership prior ro death, their gross estate will include only the discounted value of the minority partnership interests that they retain at the time of passing.



Why do some people choose to create a corporation, limited liability company, or management trust to be an FLP general partner?

By law, a limited partnership dissolves upon death or disability of its general partner. These entities are used to provide continuity within the partnership if such event occurs. They are also used to create an additional layer of protection from the claims of aggressive judgment creditors.

Using a corporation as a general partner also provides income tax planning options. The corporation may charge fees and receive income for management of and duties performed for the FLP. This use of a corporate general partner can shift some of the income from the limited partnership to the corporate general partner. The corporation can then use the income to pay salaries or set up retirement and other tax-advantaged plans such as welfare benefit trusts, defined-benefit plans, and medical reimbursement plans. As a result, the family is able to shift income from higher to lower income tax brackets and at the same time set up retirement pension plans for family members who are employees of the corporate general partner.

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What is a Family Limited Partnership (FLP)?

A family limited partnership (FLP) is a legal entity formed under your state's limited liability partnership law between you and some of your family members.

Does and FLP work just like a standard limited partnership?

An FLP works like any other limited partnership under your state's statutes. The FLP has two kinds of partners: general partners and limited partners.

The general partners have 100 percent control over and responsibility for the management of the partnership and its assets, and they are 100 percent liable for the acts or omissions to act of the partnership and all the other general partners. After setting up the FLP, strategic family assets are transferred into it, including investments and business interests. When the transfers are complete, individuals no longer own a direct interest in these assets. Instead, as general partners they own a controlling interest in the FLP, and it is the FLP which owns the assets.They decide when assets are bought and sold and the timing and amount of the partnership's income and capital distributions.

The limited partners have no control over either the assets or int income if the partnership. The also have no authority over the general partners. They cannot fire the general partners or replace them. Their legal authority and roles are narrowly defined by all states' statutes. Limited partners are not liable for the acts of the general partners and are not liable for claims against the partnership or for partnership debts. They are liable, or at risk, only up to the amount of their partnership investment or interest.

Who are the general partners of an FLP?

The general partners almost always are parents or grandparents or corporations, limited liability companies, or management trusts controlled by those individuals.

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