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.