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OVERVIEW OF FAMILY LIMITED PARTNERSHIPS

If you would like to keep a family business or other major assets in the family, you will need to transfer ownership to younger generations.  You may worry that young family members are not ready to handle the responsibility.  On the other hand, assets that are not transferred during your lifetime could be vulnerable to estate taxes and the future claims of creditors.  If this dilemma sounds familiar, your estate plan might benefit from a Family Limited Partnership (FLP).

A Family Limited Partnership is a flexible financial arrangement that lets you transfer ownership of assets without giving up control.  Additionally, the IRS now allows transfers of closely held stock or business interests to family members at a discount.  Although nearly any type of asset can be transferred, the cost and complexity of an FLP make it most appropriate for family businesses and farms.

The structure of an FLP is similar to other types of limited partnerships.  First you retitle assets so they are owned by the partnership.  You become the general partner, which keeps you in charge of management decisions.  Partnership interests can then be transferred to family members who become limited partners.  Each limited partner owns a proportional share of the assets held by the FLP and must pay taxes on a corresponding portion of partnership income.  If the limited partners are in lower tax brackets, the FLP can reduce overall income taxes.

Access to the assets in an FLP is controlled by the general partner.  Therefore, a limited partner's interest is valued at something less than its actual fair market value.  The amount of the discount is based on the term of the partnership and the degree to which a limited partner's rights are restricted.  In some cases it can be as high as 50 percent.

By transferring partnership interests at their discounted value, you can accelerate the transfer of assets to your heirs while keeping within the $11,000 annual gift tax exclusion.  The value of the transferred partnership interests is not included in your taxable estate upon your death.  As a result, future appreciation completely escapes estate tax.

The restricted access to FLP assets can also protect limited partners from the future claims of creditors.  In many cases, a creditor can only get a "charging order" to collect income attributed to a limited partner's interest.  Access to the actual partnership assets could be blocked.

FLPs are flexible arrangements that can be altered or even discontinued with changing circumstances.  Of course, all of the partners would have to agree to any future changes.

If you have a sizable asset - such as a business or family farm - and are facing high estate taxes when you eventually transfer it all to your children, this sophisticated estate planning tool offers a valuable solution. 

 


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