A family limited partnership can be used to give parents the power to retain management and control over the assets of a family business, while allowing them to gift the value of these assets to their children. This particular type of business structure can be particularly beneficial to small businesses and families who own substantial real estate they want to keep in the family for future generations.
Starting a business is can be an enormous achievement for families, however maintaining that business can be a challenge for some. Whether your business is big or small, challenges you will likely face include hiring the right employees, building a successful brand and selecting the appropriate business entity. You should consider a family limited partnership and here is why.
Benefits of a family limited partnership
If your family needs help in handling their assets and family investments, then a family limited partnership may be the answer, especially if your family has considerable real estate holdings. In fact, this type of partnership can be very profitable, while saving thousands in estate and gift taxes. The partnership itself is not taxable because the owners report the income and deductions of the partnership on their personal tax return. A family limited partnership can also provide asset protection benefits.
How does a family limited partnership work?
A Family Limited Partnership is basically a special type of limited partnership. What basically makes a family limited partnership different is the fact that all partners are family members. Much like other types of partnerships, there are two types of partners that are involved: general partners and limited partners. The general partners essentially control all of the investment and management decisions and they also bear 100% of the partnership liability. On the other hand, limited partners do not participate in the management of the partnership, and are exposed to very limited liability.
It is usually the case that the senior family members (e.g., parents or grandparents) contribute the initial assets to the partnership in exchange for a large limited partner interest and a smaller general partner interest. The senior members can then transfer all or a part of the limited partner interest to their heirs, either directly or through a trust agreement.
Tax benefits when transferring assets to children
When senior family members eventually transfer assets to their children, they are essentially removing those assets from their own estate for purposes of federal estate tax. But, the senior members will maintain control over the investment distributions and other business decisions. The partnership assets that are transferred are also eligible for the annual gift tax exclusion, which is a very useful way to reduce income, gift and estate taxes. Furthermore, the value of limited partnership shares will be discounted when they are transferred to other family members.
Other advantages of a family limited partnership
A family limited partnership is quite flexible, which allows owners to amend the partnership agreement as family circumstances frequently change. A family limited partnership also provides assets protection against the claims of future creditors or legal judgments. In the event of a divorce, for example, where a limited partner is no longer a family member, language in the partnership documents can include a requirement that those partners transfer their assets back to the family, at fair market value. By doing that, the assets will always remain in the family.
Financial benefits of a family limited partnership
A family limited partnership allows family members to combine their assets for the purpose of investing, which can significantly reduce investment fees. Furthermore, instead of maintaining separate brokerage accounts for each child, there need only be one brokerage account held by the partnership. Setting up this type of partnership correctly can be a challenge. For that reason, is very important to seek the assistance of an estate planning attorney who focuses on family-owned businesses.
Other estate planning options for small businesses you can consider
These are several different options for business structures from which families can choose. Since every type of business has its own advantages and disadvantages, it is important to discuss your business plan with an estate planning attorney early on so that you can find the best way to capitalize on your assets throughout your lifetime, while still ensuring they will be properly distributed after your death.
If you have questions regarding family limited partnerships, or any other business planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.