When used properly, a Family Limited Partnership can help families in handling their money, property and other family investments. This is especially important to families that have considerable real estate holdings. Family Limited Partnerships can actually be very profitable, saving families thousands of dollars in estate and gift taxes, while providing protection from creditors. What is a Family Limited Partnership and how can it help you? This article will answer those questions for you.
Defining a Family Limited Partnership
A Family Limited Partnership is just a specific type of limited partnership. Like a general limited partnership, there are two types of partners, general and limited. The general partners will control all of the investment and management decisions. They also bear 100% of the liability. Whereas, limited partners do not participate in the management of the partnership, and bear very limited liability. What makes a Family Limited Partnership distinct is the fact that all partners are family members.
Typically, the senior family members (parents or grandparents) contribute the assets to the partnership in exchange for a small general partner interest and a large limited partner interest. They can then give all or a part of the limited partner interest to their heirs, either directly, or to be set aside in trust.
The Benefits of a Family Limited Partnership
There are many tax benefits of a Family Limited Partnership. The partnership itself is not taxable. Instead, the owners report the partnership’s income and deductions on their personal tax return, based on the proportion of their interests.
When senior family members transfer assets to their children, they are removing those assets from their own estates, for purposes of federal estate tax. However, the senior members will retain control over the business decisions and investment distributions. The transfers are also eligible for the annual gift tax exclusion, which is a power tool way to reduce income, gift and estate taxes. Also, the value of limited partnership shares is discounted when they are transferred to family members.
Other advantages of a Family Limited Partnership
A Family Limited Partnership is very flexible, allowing owners to amend the partnership agreement as family circumstances change. A Family Limited Partnership also provides protection for assets against the claims of future creditors. In the event of a divorce, where a limited partner is no longer a family member, provisions in the partnership documents can require that partner to transfer assets back to the family for fair market value. That way, 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 investment purposes. This will significantly reduce investment fees. Also, instead of maintaining separate brokerage accounts of trusts for each child, there need only be one brokerage account held by the partnership, while the children or their trusts can own partnership interests.
Setting up a Family Limited Partnership properly can be a complicated task. It is very important to obtain the assistance of an estate planning attorney who specializes in family-owned businesses. With your attorney’s experience and knowledge of the applicable laws and tax issues that affect family-owned businesses, your family’s future can be protected.
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.